ECB to tread carefully today

The euro and sterling both popped higher against the dollar yesterday following firmer than expected January PMI readings, particularly for the UK. They have both come off a bit since and are trading at around $1.0890 and $1.2720 respectively this morning, with EURGBP still at about £0.8550, ahead of the ECB meeting and fourth-quarter US GDP data later today.

Government bond yields ended flat to marginally higher on the day and are creeping up at the start of play this morning. Meanwhile, European equity markets had a positive session, gaining almost 2%, while the S&P 500 closed at a new record high albeit on the back of modest gains.

Economic growth in the UK picked up at the start of 2024 judging by the January PMI readings, with the Composite Index rising to 52.5 – above the key 50 level  – led by strengthening services sector activity. The equivalent index for the Euro area ticked up this month but at 47.9 points to a continuing decline in economic activity.

The ECB is likely to tread carefully at today’s meeting. It will probably stress that there’s still “work to be done” on inflation, and again highlight that it needs to see the outcome of wage negotiations in the opening months of this year to be confident inflation will evolve in line with its forecasts, which means holding rates steady for a while longer. But with the economy bouncing along the bottom at best, underlying inflation is likely to fall further, so it seems only a matter of time before it begins to unwind some of the substantial tightening of monetary policy put in place over the past 18 months or so.

The pace of GDP growth in the US economy is expected to have slowed in the final quarter of 2023 after a very strong third quarter.  The consensus forecast is for annualised growth of 2%, down from almost 5% in Q3. The consensus expects core (PCE) consumer prices to have risen at an annualised rate of 2% in Q4 – in line with the Fed’s target – for a second quarter in a row.