Euro a little firmer

The euro dipped to a low for the week of about $1.0450 during Friday’s session but is trading just north of $1.05 this morning. Sterling finished close to its low for the week on Friday and is just a touch firmer at $1.2630 at the start of play today. EURGBP fell to a multi-year low of £0.8220 mid-week but has since regained about a penny to trade at £0.8320. Looking to the week ahead, the Fed and Bank of England announce interest rate decisions on Wednesday and Thursday respectively with the former expected to cut by 25bps to 4.25%-4.5% and the latter seen staying on hold at 4.75%.

Government bond yields backed up further on Friday. German 2- and 10-year yields both rose by around 5bps, bringing the cumulative increase post Thursday’s ECB meeting to about 12bps, while equivalent US and UK yields also rose by around 5bps at the end of week. Higher bond yields weighed on equities, with European and US stocks ending flat on Friday and slightly lower on the week overall.

ECB member Makhlouf said on Friday that while “the direction of travel on interest rates is clear…the exact pace and number of further reductions depends on inflation outturns continuing to move in line with our projection,” adding that “as the short-run outlook for inflation becomes more stable…the factors that affect economic growth will come to the fore in future policy debates.”

Industrial production in the Euro area was flat in October and was still running more than 0.5% below its level in Q3, suggesting this sector will continue to act as a drag on economic growth in the final quarter of the year.

There is a heavy schedule of economic data this week. This includes today’s flash PMIs for December in the main economies; retail sales, industrial production  (both Tuesday) and PCE inflation (Friday) in the US; and the latest labour market (Tuesday), CPI inflation (Wednesday) and retail sales (Friday) reports in the UK.