Dollar remains under presssure
It was quiet enough in markets yesterday given the Thanksgiving holiday in the US. The dollar is under pressure today though, shedding around 1% against the yen following stronger than expected inflation data in Japan which have prompted speculation about an increase in interest rates there. The euro and sterling have also gained ground against the US currency, trading at $1.0570 and $1.2710 this morning – up around 1.5 and 2 cents respectively from last Friday’s close – while EURGBP has nudged down to about £0.8315. Euro area inflation data for November are due this morning, which will help further shape expectations about next month’s ECB meeting – the market expects a 25bps cut but is pricing in a small chance of a 50bps move.
Government bond yields continue to drift down. German and UK yields fell yesterday and are lower again this morning, while a further decline in US yields sees them back at (in the case of 2-year yields) or below (for 10-year yields) their levels just before the US election. In equity markets, European stocks halted a two-day decline, closing around 0.5% higher yesterday.
Economic confidence in the Euro area remains subdued according to the European Commission’s Economic Sentiment Indicator. It nudged up a touch in November but remained close to its lows for the year, while consumer confidence dipped in the month.
ECB member Villeroy says inflation should be “sustainably” at the 2% target “in the near future”, and with a “sluggish growth outlook, there won’t be any reason for monetary policy to remain restrictive”, hence “interest rates should clearly go to the neutral rate” (which he estimates is in the range of 2% to 2.5%).
Today’s Euro area inflation data are expected to show headline inflation nudged up to 2.3% in November from 2% in October, according to the consensus forecast, while core inflation is seen ticking up to 2.8% from 2.7%. Also today, the ECB publishes its latest survey of consumer inflation expectations, while other data due include mortgage lending/approvals and consumer credit in the UK.