The dollar has been under pressure since last Tuesday’s inflation data in the US. It has shed more than two cents against both the euro and sterling in the intervening period, closing out Friday at or close to its lows for the week, and kicks of this week trading just north of $1.09 and just shy of $1.25 respectively. All of this means EUR/£ remains confined to a tight trading range, with the pair starting the week at around 87.5p.
There was a sizeable decline in government bond yields last week, prompted by the inflation data in the US and indeed inflation numbers in the UK too, with 10-yields declining by 15-25bps. Lower yields supported a rally in equity markets, with US and European stocks gaining around 2% and 3% respectively, the latter reversing some of their recent underperformance.
Market expectations for interest rate cuts next year hardened over the course of last week, even as monetary policy-makers in the main central banks cautioned against an early easing of policy. On Friday, ECB member Nagel, admittedly one of the most hawkish on the Governing Council, said “it is too early to declare victory over inflation, “ adding that it is “highly improbable” rates will be cut “anytime soon.”
Fed member Collins, in a similar vein, said that the central bank needs “to stay the course” on interest rates in order to get inflation back down to 2%, adding that she wouldn’t take the need for some additional tightening of monetary policy “off the table.”
It is a light enough week for economic data, though the flash PMIs for November in the Euro area, UK (both on Thursday) and the US (on Friday) will be closely watched, while the Fed publishes the minutes of its October monetary policy meeting tomorrow (Tuesday).
The Chancellor of the Exchequer in the UK presents the Autumn Statement on Wednesday, amid speculation that he may cut personal taxes having said over the weekend that “it’s important for a productive, dynamic, fizzing economy that you motivate people to do the work, to take the risks that they need.”