Dollar gives up ground

The dollar has given up a good bit of the ground it made at the start of the week, with slightly softer than expected US inflation data for April weighing on the currency. The euro and sterling have both rebounded by the best part of a cent from yesterday morning’s levels to trade at around $1.12 and $1.33 respectively, leaving the latter back more or less where it closed last Friday before the US-China ‘reset’ over the weekend. EURGBP is trading just north of £0.84, not much changed from yesterday morning.

Government bond yields in the main markets nudged up a little further yesterday, by 2-3bps, following Monday’s sharp increase. In equity markets, US indices had a somewhat mixed day, with the Dow ending lower (-0.6%) but the S&P 500 (+0.7%) and the Nasdaq (+1.6%) gaining more ground, while European stocks advanced by around half a percent.

Yesterday’s CPI data in the US were relatively benign. Headline and core consumer prices both rose by 0.2% in April (versus+0.3% expected for both), which pushed the annual rate of headline inflation down to 2.3% (the lowest reading since Feb 2021) and left the core inflation rate unchanged at 2.8%. Core goods inflation – which has been picking up gradually since bottoming at -1.0% last October – nudged up to 0.1% last month having stood at -0.1% in each of the three months to March, perhaps reflecting some modest tariff-related effect. In any case though, this was offset by a decline in core services inflation, which dipped to 3.6% last month, the lowest reading since Dec 2021.

ECB member Villeroy says “the Trump administration’s protectionism will lead to a restarting of inflation in the US, but not in Europe, which will allow for another (ECB) interest-rate cut between now and the summer” (by which he means in June). Meanwhile, his ECB colleague Knot says the uncertainty caused by the erratic nature of US trade policy “is an absolute negative for (Euro area) economic growth in the short run, and probably also a negative for inflation” (i.e. lower inflation).

It is a very quiet day ahead in terms of economic data with little or nothing of note due for release. Tomorrow and Friday will be much busier though – retail sales, consumer confidence, industrial production and producer prices are all scheduled in the US while Q1 GDP is due in the UK.