Euro drifts lower
The euro is trading at about $1.0350 and £0.8280 against the dollar and sterling respectively at the start of 2025, not much above its 2024 lows of $1.0335 and £0.8225 set in November and December respectively, while the pound is hovering around $1.25 against the US currency this morning. A diverging outlook for central bank interest rates has weighed on the euro recently, with the market expecting the ECB to cut the deposit rate by almost 125bps over the year ahead but the Fed and the Bank of England seen lowering their respective policy rates by just (circa) 40bps and 60bps over the same period.
US government 10-year bond yields drifted upwards into year-end post the Fed’s more hawkish than expected monetary policy meeting in mid-December, ending 2024 just below 4.60% (not far shy of last year’s high of 4.70% in late April). German and UK 10-year yields followed suit, closing out the year at 2.36% and 4.56% respectively. Meanwhile, in equity markets, the S&P 500 in the US finished 2024 off its early December all-time high but chalked up gains of 23% for the year as a whole. US stocks also significantly outperformed European equities, which rose by around 8% last year.
ECB member Holzmann says the central bank “could take more time before lowering rates again” having cut at each of its past three meetings. The market begs to differ though – it fully expects the ECB to reduce rates by another 25bps at its first meeting of 2025 at the end of this month.
Ahead of a flash reading for December Euro area inflation due next week, preliminary data for Spain and Ireland show headline inflation rose to 2.8% and 1.0% respectively last month, up from 2.4% and 0.5% in November. In its December monetary policy statement, the ECB said it expected Euro area inflation (which stood at 2.2% in November) “to fluctuate around its current level in the near term, as previous sharp falls in energy prices continue to drop out of the annual rates (but) should then settle sustainably at around the 2% target.”
UK house prices rose for a fourth consecutive month in December according to the Nationwide index published earlier this morning, increasing by 0.7% from November. This brought the increase over the 12 months to December to 4.7% and follows a fall in prices of 1.8% over the 12 months to December 2023.
Economic data due today include final manufacturing PMI readings for December in the main economies, as well as money supply/credit growth in the Euro area and weekly jobless claims and construction spending in the US.