Dollar loses more ground
The euro has gained ground against the dollar following softer than expected US manufacturing data released yesterday. EURUSD is trading at $1.0890 this morning, off an overnight high of almost $1.0920, ahead of the ECB meeting on Thursday. Having fallen to a near 3-year low last week, EURGBP has steadied again and is trading at around £0.8515. The pound has also gained ground against the dollar, briefly breaching $1.28 before dipping back to around $1.2790.
The weak manufacturing data prompted a decline in US bond yields, as the market priced in a bit more by way of Fed easing this year, with 10-year yields falling by around 12bps to 4.40% (with equivalent German and UK yields around 8-10bps lower). The soft data weighed on US stocks, though the S&P 500 did manage to reverse initial losses to finish unchanged on the day. European indices closed earlier with gains of around 0.4%.
The ISM index of activity in the US manufacturing sector fell again in May, remaining in contractionary territory for a second month in a row (at 48.7) led by a sharp decline in new orders. The latest available official manufacturing data shows outpull fell in April.
Friday’s PCE inflation data in the US were in line with expectations, with both the headline and core rates of inflation remaining unchanged in April at 2.7% and 2.8% respectively. The Fed will be reasonably reassured by the 0.2% month-on-month increase in core PCE prices in April, which was smaller than the average increase over the first three months of the year.
The ECB is almost certain to lower interest rates at this week’s Governing Council meeting, with a 25bps cut in the deposit rate (to 3.75%) fully priced in by the market at this stage. The ECB may not give away too much about the pace of rate cuts beyond June though, more so perhaps following the latest inflation data which came in firmer than expected with headline and core inflation increasing to 2.6% and 2.9% respectively in May (from 2.4% and 2.7% in April).
Economic data due today include job openings and factory orders in the US, while the key release of the week is Friday’s US employment (payrolls) report – the consensus expects the economy to have added 185k jobs in May (+175k in April) with the unemployment rate remaining at 3.9%.