Dollar gives up gains

Amid a scarcity of economic data releases (partly due to the US government shutdown), the dollar threatened to break higher yesterday but was unable to hold onto its gains. This sees EURUSD back at around $1.1725 this morning having traded down to a low of $1.1680 yesterday, while similarly, sterling is trading just under $1.3450 against the US currency, off yesterday’s low of $1.34 or so. EURGBP meanwhile has bounced off Wednesday’s lows of a little under £0.87, trading  at about £0.8725 at the start of play today.

Equity markets have taken the US government shutdown in their stride. The main US indices closed at new all-time highs yesterday albeit on the back of modest gains, while European stocks outperformed once again, ending between 0.5% and 1% higher on the day. Meanwhile, it was fairly uneventful in government bond markets with yields ending largely unchanged on the day.

While the market is pricing in more or less two more 25bps cuts in US interest rates by the end of this year, some Fed members remain cautious about lowering them further. The head of the Dallas Reserve Bank yesterday noted that the current stance of monetary policy “doesn’t appear more than modestly restrictive”, with the labour market “fairly balanced” and inflation running above the 2% target, and indicated she favours just one more rate cut (at most) this year.

One notable feature of the performance of the Euro area economy has been the resilience of the labour market. Employment has continued to increase, although the pace of growth has eased recently, and the unemployment rate has declined. The latter fell  to a record low of 6.2% in November last year and has remained between 6.2% and 6.4% since, with the latest reading showing it at 6.3% in August.

Markets will have some economic data to digest today (despite the absence of the US jobs report), most notably the ISM services index for September in the US. Final readings for the September services PMIs in the Euro area, US and UK, and producer prices data in the Euro area, are also scheduled for release. There are a good number of Fed and ECB members due to speak over the course of the day.