Dollar on the back foot

In remarks to the World Economic Forum in Davos yesterday, Donald Trump said he would put pressure on OPEC to lower oil prices and demand the Fed cut interest rates in response to the resulting lower inflation. He also said he would cut taxes for business in the US and would tariff goods coming into the country, though he said he wanted a ‘fair’ relationship with China. In terms of the market response, which was limited enough, oil prices fell by more than a dollar, US equities ended higher on the day, US bond yields were mixed, and the dollar lost some ground. The euro and sterling have strengthened to $1.0490 and $1.24 against the US currency, with EURGBP trading at around £0.8455. German and French PMI data for January released a very short while ago were a touch firmer than expected, which is providing some support to the euro.

In bond markets, US 2-year yields ended marginally lower yesterday but 10-year yields closed slightly higher, though both have edged down in overnight trading in Asia. In equity markets, the S&P 500 added around 0.5% to close at a new record high, while European stocks had earlier ended with modest gains of around 0.2%.

The Bank of Japan raised interest rates by 0.25% to 0.5% at its latest monetary policy meeting, as largely expected, noting that underlying inflation has been increasing gradually towards the 2% target. It also said if inflation evolves in line with forecasts, it will continue to raise interest rates and reduce the degree of monetary accommodation.

Consumer confidence in the UK fell sharply in January according to the latest survey from GfK. Its sentiment indicator dropped 5 points to -22, its lowest level since the end of 2023, with GfK noting that “these figures underline that consumers are losing confidence in the UK’s economic prospects.”

Looking to the day ahead, the focus will be on the flash PMIs for January in the main economies. In the Euro area, the composite PMI improved slightly in December but remained below the key 50 level, while the equivalent index for the UK fell for a fourth month running to just above 50, both indicating weak activity in the respective economies. In the US, in contrast, the composite index was comfortably in expansionary territory in December at 55.4. The consensus expects the January data to show little change to this picture.