Dollar remains under pressure
Notwithstanding a decent rebound in US bond and equity markets, the dollar remains under pressure following Moody’s credit rating downgrade. It is trading at around $1.1270 and $1.3380 against the euro and sterling respectively this morning, only marginally off yesterday’s lows (of about $1.1290 and $1.34). EURGBP is largely unchanged as it continues to hover just above the £0.84 level, with yesterday’s EU-UK deal having little or no impact on the pair.
US bonds recovered quite strongly from an initial credit downgrade-related sell-off, with 10-year yields falling by some 10bps from their peak levels to end slightly lower on the day. Equivalent German and UK yields also reversed an earlier increase to finish flat to marginally higher overall. It was much the same story in equity markets. US stocks ended unchanged, having been down more than 1% at one stage, while European stocks also finished flat on the day.
The European Commission has lowered its forecasts for Euro area growth and inflation in light of recent developments in US trade policy. It now expects the economy to expand by 0.9% this year, revised down from 1.3% in last autumn’s projections, and by 1.4% in 2026, revised from 1.6%. The Commission expects inflation in the zone to average 2.1% this year, unchanged from its previous forecast, and 1.7% next year, lowered from 1.9%. Inflation is seen dipping below the ECB’s 2% target in the final quarter of this year and remaining below 2% through all of 2026.
Fed member Williams says it will take time to assess the impact of tariffs on US growth and inflation, noting that “it’s not going to be that in June or July we’re going to understand what’s happening” in the economy. This suggests the central bank intends keeping interest rates on hold for a while longer yet. Indeed, the market is currently not pricing in a full quarter-point cut in rates until the final quarter of this year.
It’s a relatively quiet day ahead in terms of economic data, with consumer confidence and construction output in the Euro area the only releases of any note.