Dollar remains on the back foot
The dollar remains on the back foot as it reverses course following its large gains at the start of the week. The euro and sterling have strengthened to $1.04 and $1.25 respectively, leaving EURGBP hovering just above £0.83. The single currency though still remains well off last week’s best levels against the dollar and the pound (of around $1.05 and £0.84), reflecting a firming of rate cut expectations since Thursday’s ECB meeting. Before the meeting the market was pricing in a reduction in rates of circa 100bps in total this year; now it is pricing in the best part of another 100bps cut in rates by year-end following last week’s 25bps reduction to 2.75%.
US bond yields fell back yesterday – largely reversing Monday’s spike higher – amid softer than expected US labour market data, while German and UK yields nudged a little higher following their sizeable decline at the start of the week. Equity markets rebounded from Monday’s sell off with US and European stocks gaining almost 1%, though the latter have opened softer this morning.
The number of job openings in the US fell quite sharply in December, according to yesterday’s data, but this followed two months of rising vacancies in October-November. Job openings now appear to be levelling off, having declined steadily since 2022, consistent with the Fed’s assessment that the labour market is stabilising. The latter, together with still above-target inflation, leaves the Fed in “no hurry” to cut interest rates again, as it stated following last week’s meeting.
ECB member Villeroy says inflation in the Euro area is “in the process of coming back toward our 2% objective” (notwithstanding January’s firmer than expected reading of 2.5% published on Monday), meaning there are “probably” more interest rate cuts to come in the period ahead.
Looking to the day ahead, the ISM services index and ADP employment report (both for January) are due In the US, and producer prices are scheduled in the Euro area, while the ECB publishes its latest Wage Tracker Indicators data.