Dollar loses some more ground

The euro and sterling have both gained some further ground against the dollar. The single currency is trading back above $1.08 and the pound has strengthened to almost $1.2650, leaving EURGBP at about 85.6p this morning. It is interesting to note that, despite stronger than expected US employment (payrolls) and inflation data published during February, the dollar has progressed very little and indeed is not much changed from where it closed out January.

UK gilts led a decline in bond yields, as Bank of England members acknowledged that interest rates are likely to fall this year, with 2- and 10-year yields down around 6-8bps (and equivalent German yields about 3-4bps lower). In equity markets, European stocks ended essentially flat for a second session running, while US indices closed lower with the S&P 500 off around 0.6%.

The Governor of the Bank of England, Andrew Bailey, told a Treasury Select Committee hearing that it’s “not unreasonable” to expect interest rates to be cut in 2024, though he stressed that the timing of any reduction will depend on making further progress in reducing wage growth and services inflation, both of which have declined recently but still remain elevated.

The annual rate of growth in negotiated wages in the Euro area eased slightly in the final quarter of 2023, to 4.5% from 4.7% in Q3, according to the ECB’s indicator published yesterday. The ECB is closely monitoring wage negotiations in the opening months of this year, and expects a deceleration in wage growth in 2024-2025 to contribute to a decline in inflation back to target.

Economic data is thin enough on the ground again today, with consumer confidence due in the Euro area. The Fed publishes the minutes of its January meeting, at which it noted that it “does not expect it will be appropriate to reduce (interest rates) until it has gained greater confidence that inflation is moving sustainably toward 2%.”