Euro firmer ahead of Fed/ECB meetings
The euro has regained ground against the dollar following Friday’s softer than expected US inflation data and ahead of Fed – expected to cut by 25bps – and ECB – expected to stay on hold again – interest rate announcements tomorrow and Thursday respectively. Positive sentiment in equity markets, fuelled by optimism regarding some sort of US-China trade ‘deal’ (Trump and Xi are scheduled to meet on Thursday) also weighed on the dollar yesterday. EURUSD is trading at about $1.1660 this morning, around three-quarters of a cent off last week’s lows. Sterling has also regained some ground against the US currency to trade at about $1.3320, up from lows late last week of circa $1.3290. EURGBP firmed a touch towards the end of last week and is trading at around £0.8750 at the start of play this morning.
US equity markets rallied quite strongly yesterday with the S&P 500 and Nasdaq gaining 1.2% and 1.9% respectively, closing at new record highs to boot. European stocks underperformed but still added around 0.6%. It’s a key week for company earnings reports, with Microsoft, Alphabet, Meta, Amazon, and Apple all due to announce results across Wednesday and Thursday. In government bond markets, US 10-year yields managed to close marginally lower on the day (by a couple of basis points), notwithstanding the rally in stocks, with German and UK yields following suit.
Friday’s CPI report in the US showed headline and core consumer prices rose by 0.3% and 0.2% month-on-month respectively in September, slightly smaller increases than the market expected (+0.4% and +0.3% respectively). This resulted in the annual rate of headline inflation nudging up to 3% from 2.9% in August and the annual rate of core inflation edging down to 3% from 3.1%. Within core, goods inflation remained at 1.5%, having accelerated quite sharply over the previous few months reflecting the impact of higher tariffs, while services inflation dipped to 3.5% having been ‘stuck’ at 3.6% recently. The data have reinforced market expectations that the Fed will cut rates again at this week’s monetary policy meeting.
Euro area PMI data for October came in ahead of expectations. The composite index rose to a 17-month high of 52.2 this month, driven by a jump in the services index to 52.6 with the manufacturing index rising slightly to the ‘no change’ level of 50. With the composite index running ahead of its Q3 average (51.2), the latest data are consistent with the ECB’s expectation that the pace of GDP growth will pick up in the final quarter of this year, reinforcing the case for the central bank to keep rates on hold again this week.
Looking at the rest of the week ahead, the main focus will be on the Fed and ECB meetings, the former particularly. Some key Euro area economic data are scheduled for release, including a first estimate of GDP growth in Q3 on Thursday – expected to show the economy grew by 0.1% over the three months to September, the same as for the April-June period – and a flash reading for inflation in October on Friday – expected to show headline and core inflation dipping to 2.1% and 2.3% respectively from 2.2% and 2.4% in September.