Dollar giving up some ground

The euro and sterling both shed more than a cent against the dollar over the course of last week. They ended off their lows (of around $1.0225 and $1.2350 respectively) however, and are gaining some further respite at the start of play this week trading at around $1.0340 and $1.2475. EURGBP was little changed overall last week and is hovering just below £0.83p this morning. Markets get back into full swing this week and will have plenty of economic data to digest, including Euro area inflation for December tomorrow and the US jobs report (also for December) on Friday.

In government bond markets, German yields backed up further last week, notably at the shorter-end of the curve with 2-year yields increasing by around 6bps (as the market pared back ECB rate cut expectations a bit), while US and UK yields both edged down on the week. In equity markets, the S&P 500 had a positive session on Friday, gaining more than 1%, albeit still ending lower on the week, while European stocks shed almost 1% on the Friday to close down on the week overall.

The ISM index of manufacturing activity in the US rose in December albeit it remained in contractionary territory (at 49.3), indicating this sector of the economy continues to exert a modest drag on growth. The latest estimate from the Atlanta Fed puts quarterly GDP growth at 0.6% in Q4, versus the Q3 outturn of 0.8%.

Fed member Daly says the central bank has more to do to return inflation sustainably to the 2% target but at the same time she does not want “to see further slowing in the labour market”, suggesting the Fed will now adopt a cautious approach to lowering interest rates having cut them at each of its past three meetings.

Looking to the day ahead, economic data due include final readings for December services PMIs in the main economies as well as CPI/HICP inflation for December in Germany and factory orders in the US.