Dollar on the back foot again

The dollar lost ground yesterday as US stocks gave up early gains to end broadly flat and US bond yields reversed an early increase to finish lower on the day. The euro strengthened to an intra-day high of $1.1425 but has since retreated to just under $1.14. The pound outperformed, setting a new 2025 to date high of almost $1.3450 against the dollar – it’s currently trading at around $1.34 – and strengthening to £0.85 against the euro, which is the middle of the circa £0.8250 to £0.8750 range that has contained all of the price action in EURGBP year to date.

In government bond markets, the short-end of the US curve outperformed with 2-year yields falling by around 5bps while 10-year yields were about 3bps lower. Equivalent German and UK yields, in contrast, ended slightly higher on the day. In equity markets, European stocks chalked up modest gains (less than 0.5%) and the S&P 500 was flat, as investors await earnings results from some of the “big tech” companies over the course of the week.

ECB’s Rehn says “if inflation is projected to fall below our 2% inflation target over the medium term, then the right reaction is to cut rates further,” adding that “it is important that we do not let any thresholds, such as an estimated neutral rate, constrain us.” Updated forecasts for growth and inflation will be available at the ECB’s next meeting in June. The market currently sees the deposit rate bottoming out at around 1.5%, from 2.25% currently.

It’s quite a busy day ahead in terms of economic data. Money supply/credit growth, the April Economic Sentiment Indicator, and the ECB’s latest inflation expectations survey are due in the Euro area, while consumer confidence (also for April), job openings and the trade balance are scheduled in the US.