Euro drifts lower

The euro has drifted down against the dollar and sterling ahead of tomorrow’s ECB meeting, with widening yield differentials weighing on the single currency. It is trading at $1.05 against the dollar this morning and has weakened to £0.8240 versus sterling, its lowest level since the UK vote to leave the EU in late June 2016. The pound is holding its own against the dollar, trading at around $1.2750, not much changed from yesterday morning. US CPI inflation data for November are due later today, the final top tier release before next week’s Fed meeting.

In bond markets, German yields fell relative to US and UK yields yesterday. In particular, the 2-year yield differential widened by the best part of 10bps, with German yields falling by around 5bps and US and UK yields increasing by circa 3bps. German 10-year yields were flat on the day, but equivalent US and UK yields nudged higher.

European stocks gave some more of last week’s sizeable gains, shedding around 0.8% yesterday, while the S&P 500 in the US retreated further from last Friday’s all-time high, falling by around 0.3%.

In the US, the small business optimism index surged in November, increasing to its highest level since June 2021, according to the latest survey from the National Federation of Independent Business. It notes that the November “election results signal a major shift in economic policy, leading to a surge in optimism among small business owners” (who are) “particularly hopeful for tax and regulation policies that favour strong growth.”

Today’s CPI data in the US are expected to show headline and core consumer prices both rose by 0.3% in November. This would push the headline rate of inflation up to 2.7% (from 2.6% in October) and leave the core inflation rate unchanged at 3.3%. Other US data due today include real hourly/weekly earnings and the Federal Budget balance.