Dollar maintaining its firmer tone
A fall in oil prices – Brent crude dipped below $100 per barrel for a time – contributed to a decent rally in bond and equity markets. Lower oil prices did nothing to dent the dollar though, which is maintaining the firmer tone it’s had since last week’s Fed interest rate hike. That said, there’s not much change in the main currency pairs. The euro and sterling are trading at around $1.1460 and $1.3360 against the US currency, a touch weaker than yesterday morning’s levels. This in turns leaves EURGBP trading at around £0.8575 at the start of play this morning.
Government bonds rallied as oil price fell. German and UK yields declined by around 5-9bps across the curve, while US yields were up to 5bps lower with the benchmark 10-year edging down from the 5% level. Yields generally are nudging up this morning though as oil prices tick higher again. Equity markets had a positive session. The S&P 500 gained for a third day running, adding around 1.5%, while European stocks rebounded from Friday’s fall, advancing by just over 1%.
ECB Chief Economist, Philip Lane, says “we are now witnessing a second wave of (energy) price rises, not only in oil but also in gas…which will lead to higher and more persistent inflation,
before a decline towards our 2% target from mid-2027 onwards.” He also notes that the “European economy should continue to grow at a steady but moderate pace, provided the energy shock does not intensify.”
Fed member Goolsbee says “supply shocks have come more frequently, hit harder and lasted longer,” adding that “once supply shocks to inflation become persistent, some of the logic behind ‘looking through’ no longer holds.” He notes that, in such circumstances, “the only way to bring inflation down is to raise interest rates and narrow the gap between supply and demand, even if it’s not in the exact same sectors where the cost shocks are occurring.”
Ahead of next month’s budget in the UK, public finances data published a short while ago show public sector net borrowing was £77bn in the financial year (FY) to August i.e. April-August. This was £2.2 billion (or 2.7%) less than in the corresponding period in 2025 but just over £8bn above the OBR’s forecast for this stage of the financial year. The new Chancellor has said he will stick to his predecessor’s fiscal rules, which won’t allow him much ‘room for manoeuvre’ in his first budget.
It is quiet on the economic data front today with consumer confidence (September) due in the Euro area and the ADP weekly employment report scheduled in the US. A number of ECB and Fed members are due on the wires over the course of the day.