Euro a touch firmer
Stronger than expected Euro area GDP growth and higher than expected inflation in Germany have provided some modest support to the euro, which has firmed to around $1.0860 against the dollar and to about £0.8360 against sterling. The pound has also lost some ground to the dollar, slipping to $1.2980, notwithstanding Chancellor Reeves first budget, which the UK’s fiscal watchdog says will boost both growth and inflation in the short-term. The day ahead sees the release of Euro area and US inflation data, but the main currency pairs might tread water before tomorrow’s key jobs report in the US.
Higher government bond yields were the order of the day yesterday, amid some paring back of the scale of expected rate cuts from the main central banks over the course of the next year or so. German 2- and 10-year yields rose by 12bps and 5bps respectively, while equivalent US yields increased by 10bps and 5bps, with UK yields finishing 5-6bps higher on the day. In equity markets, European stocks had another poor session, shedding more than 1%, while in the US the Nasdaq failed to build on Tuesday’s gains, slipping by around 0.6%.
Euro area GDP growth surprised to the upside in Q3 coming in at 0.4% q-o-q, ahead of the consensus forecast – and the ECB’s September forecast – for a gain of 0.2%, helped by a surprise increase in GDP in Germany. A breakdown of the components of growth is not yet available, but it seems consumer spending in the zone recovered in the quarter having fallen slightly in Q2. Separately, the annual rate of inflation in Germany reaccelerated more strongly than expected in October, rising to 2.4% from 1.8% in September.
The US economy expanded at a solid pace again in Q3 with GDP increasing by 0.7% q-o-q – almost all of it accounted for by a 0.9% increase in consumer spending – which contributed to a modest deceleration in the y-o-y rate of growth to 2.7% from 3% in Q2.
Yesterday’s budget in the UK delivered “a large, sustained increase in spending, taxation, and borrowing” according to the Office for Budget Responsibility (OBR), and was “one of the largest fiscal loosenings of any fiscal event in recent decades.” The OBR expects the budget to boost growth and inflation in the short-term, which could have implications regarding the pace at which the Bank of England lowers interest rates.
Today’s CPI inflation data in the Euro area are expected to show headline inflation nudging up to 1.9% in October (from 1.7% in September) but core inflation edging down to 2.6% (from 2.7%), while the latest PCE inflation readings in the US are expected to show the headline and core rates at 2.1% and 2.6% respectively in September (versus 2.2% and 2.7% in August).
Other data due today include the employment cost index (Q3) in the US, which is closely watched by the Fed as an indicator of wage pressures in the economy, and unemployment in the Euro area.