Dollar under pressure
US equities, bonds and the dollar sold off in tandem during yesterday’s session. This followed comments by Donald Trump strongly criticising the Fed (and its Chair Jerome Powell in particular) for not lowering interest rates, which obviously raises concerns about the central bank’s independence in setting monetary policy and in turn erodes already fragile investor confidence in US assets. The euro is trading just north of $1.15 against the dollar this morning (levels last seen in late 2021), and sterling is up to around $1.34 (matching its 2024 highs last September), having closed out last week at around $1.14 and $1.33 respectively. This in turn sees EURGBP hovering just below £0.86, little changed from last week’s close.
US long-dated bond yields rose sharply yesterday with 10-and 30-year yields both increasing by more than 10bps, though 2-year yields fell by about 5bps. European yield curves are also steeper at the start of play today, with 2-year yields lower but yields further out flat to marginally higher. In equity markets, the main US indices shed around 2.5%, while European equity markets have opened slightly lower this morning.
As widely expected, the ECB lowered the deposit rate by 25bps to 2.25% following last Thursday’s Governing Council meeting. It said that “downside risks to economic growth have increased”, with the “major escalation in global trade tensions” likely to lower euro area growth by dampening exports, and also cited a number of downside risks to inflation, including falling global energy prices, the appreciation of the euro, and adverse financial market reactions to global trade tensions (which could weigh on domestic demand and hence also lower inflation). Rate cut expectations firmed post the meeting, with the market pricing in the best part of a further 75bps reduction in the deposit rate by the end of this year.
Looking to the week ahead, the main releases of note are the flash PMIs for April in the main economies, due tomorrow (Wednesday), while Euro area consumer confidence is scheduled for today and UK retail sales for Friday. The IMF publishes its latest World Economic Outlook later today.