Euro and sterling drift lower

The euro and sterling drifted lower against the dollar during yesterday’s session, partially reversing early gains despite firmer than expected Euro area and UK economic data. They are trading are around $1.0830 and $1.2670 this morning, which still leaves them slightly ahead on the week, with the euro-sterling cross at about 85.5p.

In government bond markets, curve flattening was the order of the day with 2-year yields nudging higher, as rate cut expectations were pared back a bit, while 10-year yields ended little changed. The main story of the day though was in equity markets, where a tech-inspired (AI related) rally saw US and European stocks gain 2-3%.

Yesterday’s PMI data for the Euro area and the UK came in slightly better than expected. In the Euro area, the Composite PMI rose for a second month in a row in February, but at 48.9 is consistent with the economy at best stagnating again in Q1. The equivalent index for the UK rose to 53.3, remaining above the key 50 level and holding out the prospect that the economy recovered in the first quarter after contracting over the second half of last year.

The main central banks remain cautious when it comes to lowering interest rates. Fed Governor Waller noted that “there is no rush to begin cutting interest rates,” particularly given stronger than expected US growth, employment and inflation data recently. Similarly, the minutes of last month’s ECB meeting noted that “continuity, caution and patience (in monetary policy) were still needed, since the disinflationary process remained fragile and letting up too early could undo some of the progress made” to date.

In Ireland, jobs growth remained strong at the end of last  year with employment increasing by 3.4% year-on-year in Q4 to leave the numbers in work at a record high of over 2.7 million. The unemployment rate remains low, coming in at 4.5% for a second quarter in a row.

It is quiet on the economic data front today. The ECB publishes its latest consumer inflation expectations survey, while there are a couple of ECB members scheduled to speak, including Schnabel whose topic is “Has the fight against inflation been won?” (not yet would seem to be the answer as far as the central banks are concerned).