Euro and sterling off highs vs dollar
The euro and sterling rose to highs of around $1.1270 and $1.3360 against the dollar yesterday, before retreating as the latter got some support from rising US bonds yields. They are trading at about $1.12 and $1.3290 respectively this morning, which in turn sees EURGBP a touch firmer at around £0.8430. First-quarter GDP data in the UK released a short while ago have come in slightly stronger than expected, but they’ve had little impact on the pound.
US bond yields backed up yesterday, partly reflecting some further paring back of Fed rate cut expectations, with 2- and 10-year yields rising by 5-7bps. Equivalent UK yields increased by 4-5bps, while German yields were marginally higher on the day. Less than 50bps in rate cuts over the remainder of this year is now priced in for the Fed, ECB and Bank of England. In equity markets, European stocks ended lower for the first day in five, shedding around 0.5%, while US indices had another mixed session, with the Dow Jones lower again and the S&P 500 broadly flat but the Nasdaq advancing further (+0.7%).
The UK economy grew by 0.7% q-o-q, and by 1.3% y-o-y, in the first quarter of this year according to this morning’s release, a touch firmer than expected (+0.6%), with relatively strong gains in business investment (+5.9%) and exports (+3.5%) but modest growth in consumer spending (+0.2%). Weak survey data for a April, which showed negative tariffs-related effects on activity and confidence, points to slower growth in the Q2.
Fed Vice-Chair Jefferson notes that “consumer and business sentiment have declined sharply this year” which could result in “weakening economic activity”, while “at the same time higher tariffs could lead to higher inflation” with uncertainty as to whether this would be “temporary or persistent.” Like other Fed colleagues, he says it’s appropriate to keep interest rates on hold for now.
It’s a busy data ahead in terms of economic data. In the US, releases include retail sales, industrial production, producer prices and jobless claims, while first-quarter GDP (2nd estimate) and employment are due in the Euro area.