Dollar remains on the front foot
While the ECB kept interest rates unchanged at 2% yesterday as widely expected, it was the continuing fallout from Wednesday’s more hawkish that expected Fed meeting – which dampened rate cut expectations and boosted the dollar – that drove the price action in FX markets. The euro and sterling fell to fresh post-meeting lows against the US currency during the course of yesterday’s session, of circa $1.1550 and $1.3120 respectively (the latter also the lowest level for GBPUSD since April), and both are only marginally firmer this morning, at about $1.1565 and $1.3140 respectively. EURGBP is little changed from yesterday morning at around £0.88.
US government bond yields were largely unchanged yesterday, after increasing sharply on Wednesday post the Fed meeting, while German and UK yields inched up a couple of basis points. In equity markets, US stocks sold off, led by the Nasdaq which shed around 1.6% (with the S&P 500 off around 1%), though the futures market point to a rebound at the open later today, while European stocks ended marginally lower.
To nobody’s surprise, the ECB stayed on hold at yesterday’s meeting. It said the Euro area economy has continued to grow despite the challenging global environment, inflation remains close to the 2% target, and the “Governing Council’s assessment of the inflation outlook is broadly unchanged,” while reiterating that it will “continue to follow a meeting-by-meeting approach” to determining the appropriate level of interest rates. The market expects rates to remain unchanged through the end of this year and into 2026.
GDP growth in the Euro area picked up to 0.2% q-o-q in Q3, from 0.1% in Q2, according to the flash ‘reading, slightly ahead of both the consensus forecast (+0.1%) and the ECB’s September projection (0.0%). Recent indicator data, including the October PMIs, point to a similar pace of growth in Q4. In yesterday’s post-meeting statement, the ECB noted that “the EU-US trade deal reached over the summer, the recently-announced ceasefire in the Middle East, and progress in the US-China trade negotiations have mitigated some of the downside risks to economic growth” in the zone, while “the robust labour market, solid private sector balance sheets and past interest rate cuts remain important sources” of support for the economy.
Business confidence in the UK rebounded this month according to the Lloyds Bank Business Barometer published earlier this morning, having declined sharply in September, with sentiment improving “across several regions and sectors.” Separately, house prices rose by 0.3% (seasonally adjusted) in October according to the Nationwide index, after rising 0.5% in September, pushing up the increase over the year to October to 2.4% (from 2.2% in September).
It is quiet for the remainder of the day in terms of economic data. A ‘flash’ CPI reading for October is due in the Euro area, with headline and core inflation expected to have nudged down to 2.1% and 2.3% respectively (from 2.2% and 2.4% in September) according to the consensus forecast. The ECB publishes it latest Survey of Professional Forecasters.