Dollar on the front foot again

Having gained some ground against the dollar and sterling at the open yesterday, following Sunday’s first-round election results in France, the euro has since fallen back to around $1.0720 against the US currency – which was on the front foot generally despite softer than expected economic data  – but remains higher against the pound hovering just below 85p. Sterling has also given up yesterday morning’s gains against the dollar to trade at around $1.2620. While markets await the outcome of the second round of voting in France next Sunday, they have some important economic data to digest in the intervening period, including Euro area CPI inflation later this morning and the key employment report in the US on Friday.

US government yields rose further yesterday, notwithstanding the soft economic data, with 10-year yields up another 6bps or so after jumping by around 10bps on Friday. Equivalent German yields rose by around 11bps, while French bonds outperformed with yields up just 5bps. In equity markets, French stocks outperformed their European peers, gaining just over 1%, while US indices closed slightly higher on the day.

The ISM index of manufacturing activity in the US fell for a third month in a row in June, slipping deeper into contractionary territory at 48.5, while construction spending fell slightly in May. The Atlanta Fed puts the current “run rate” for quarterly GDP growth in Q2 at 0.4%, broadly in line with the Q1 outturn (0.3%) but well below the pace of growth recorded over the second half of last year.

In her opening remarks to the ECB’s Central Banking Forum in Sintra, Christine Lagarde said “we are still facing several uncertainties regarding future inflation, especially in terms of how the nexus of profits, wages and productivity will evolve and whether the economy will be hit by new supply-side shocks”, adding that “it will take time for us to gather sufficient data to be certain that the risks of above-target inflation have passed”. The latter remarks suggest the ECB will pass on a rate cut at this month’s meeting, which indeed is what the market expects.

Today’s “flash” inflation data for June in the Euro area are expected to show the annual headline and core inflation rates both nudged down last month according to the consensus forecast, to 2.5% and 2.8% respectively from 2.6% and 2.9% in May. Other data due today include Euro area unemployment for May and job openings (May) in the US.


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