Euro and pound firmer versus dollar

The euro and sterling are both firmer against the dollar this morning after Fed Governor Waller said the central bank should cut interest rates by 25bps at its meeting at the end of this month. They are trading at around $1.1625 and $1.3430 respectively this morning, off lows yesterday of around $1.1560 and $1.3375 which followed some better than expected US economic data. EURGBP is hovering just above £0.8650, which is little changed from where it closed last Friday having traded in a relatively narrow range over the course of this week.

UK bonds underperformed slightly yesterday, albeit mostly at the short end of the curve with 2-year yields increasing by around 5bps. German and US yields across the curve were broadly flat on the day, while the latter are a touch lower overnight following Waller’s comments on interest rates. Equity markets had a positive session. European stocks more than reversed Wednesday’s Trump/Powell-related fall, closing around 1.5% higher, while the S&P 500 and the Nasdaq closed at new record highs on the back of gains of 0.5-0.75%.

Fed Governor Waller cited a number of reasons why he believes the central bank should cut interest rates by 25bps at the July 29/30 meeting. They include: tariffs are one-off increases in the price level and do not cause inflation beyond a temporary increase; GDP growth was about 1% over the first half of this year, well below the Fed’s estimate of the economy’s potential growth rate of close to 2%, and is likely to remain soft for the rest of this year; and increased downside risks in relation to employment. However, judging by comments from other Fed members, Waller is likely to be pretty much a lone voice in voting for a rate cut this month, while the market isn’t pricing in a full quarter-point reduction until October.

Yesterday’s retail sales data in the US were firmer than expected, although June’s increase of 0.6% (in value terms) didn’t full reverse a decline of 0.9% in May. Looking over the first half of this year, consumer spending has clearly stepped down from the second half of last year, which in turn is contributing to a moderation in the pace of GDP growth in 2025 to date.

For the day ahead, economic data due include the University of Michigan consumer confidence/inflation expectations survey and housing starts in the US, while construction output is scheduled in the Euro area