Dollar remains under pressure

The euro advanced to almost $1.1150 against the dollar in thin holiday trading but has since retreated to $1.1020, still a gain of more than 2 cents since the Fed’s pivot on interest rates in mid-December, while sterling briefly broke through $1.28 against the US currency before easing back to around $1.2730. This in turn sees euro-sterling trading at 86.5p this morning, within the tight range of about 85p to 88p that prevailed over the second half of 2023.

Following the sharp fall in inflation seen over the latter part of last year, the focus for investors at the start of 2024 is when and by how much the main central banks cut interest rates this year. Currently the market expects the Fed, ECB and Bank of England to begin lowering rates over the March to May period and is pricing in a cumulative reduction of circa 150bps to 175bps by end-December.

The marked repricing of interest rate expectations has contributed to a sharp decline in sovereign bond yields recently, with 10-year yields closing out 2023 at or below end-2022 levels. The fall in bond yields has also aided a rally in stocks, which gained a further 3-4 per cent in December after an exceptionally strong performance in November.

There are some important economic data due this week, notably a first estimate of Euro area inflation in December and the December employment report in the US, both scheduled for Friday. In addition, the Fed publishes the minutes of last month’s meeting tomorrow (Wednesday), which will be of particular interest given that the question of the timing of rate cuts was discussed at the meeting (according to Fed Chair Powell).