Euro firmer as dollar softens
The euro was firmer against the dollar and sterling yesterday as the US currency continues to be on the backfoot amid uncertainty about US trade policy. The greenback had popped higher against the euro midweek last week getting to under $1.1250 for a short time but it been one way traffic since then, more or less, with the euro moving through $1.14 yesterday and remains above that level this morning. The single currency is a touch higher against sterling also this morning, trading at just under 84.5p. Sterling has made some gains on the dollar yesterday however, and is hovering a little below $1.3550 area against the US currency now.
European bonds yields edging higher yesterday, though the moves overall were marginal. German 10-year yields were up 2bps to 2.52% and UK 10-years were up the same to 4.67%, equivalent US yields were up 4bps to 4.44%. Equity markets continue to be volatile but it was a relatively quite day on the data and news front so US indexes managed to squeak out some gains on the opening day of the week with the S&P up 0.4%, Nasdaq up 0.7% and the Dow flat. European indices did not perform as well with the Eurostox down 0.2% and the FTSE flat.
The ISM manufacturing reading for the US in May was lower again, down to 48.5, from 48.7 in April, staying in contractionary territory. The index indicates that manufacturing activity has contracted in the US for a third consecutive month. Survey respondents, not unsurprisingly, pointed to the significant levels of uncertainty amid frequent changes in trade and tariff policy making it difficult to manage operations. The imports index fell to 39.9, a 16-year low highlighting the difficulties in managing supply chains when the final tariff cost is unknown while the export index fell to 40.1, a five year low, as trading relationships deteriorated. The new orders index is also deep in contractionary territory at 47.6, amid an increasing uncertain outlook for the US manufacturing sector.
The manufacturing PMI for Ireland for May was 52.6, still in expansionary territory and down just a touch from 53.0 in April. This is a solid result in the current environment as April’s reading was a three year high and compares favourably to the Euro Area (49.4) and UK (46.4) which are both in contractionary territory. The report shows that the expansion reading in May was broad-based with growth in current output and new orders. There was, however, reports of weak demand from the UK and US but this was offset by robust domestic demand. Employment expanded and respondents were also upbeat about the outlook, with 39% expecting a rise in output in the year ahead while only 9% forecast a decline.
Voting FOMC member Goolsbee says that if the US “can get past this bumpy period,” i.e. if trade policy can be resolved and the Fed can judge the impact of tariffs then the Fed funds rate could be cut later this year. His colleague, Fed Governor Waller said yesterday that he also sees a path to rate cuts this year . He said he sees downsides risk to economic activity and employment and upside risks to inflation in the second half of the year, however, inflation from tariffs should be transitory and he encouraged the Fed to ‘look through’ this and plan for rate cuts later this year.
Looking to the day ahead, economic data due include the May flash inflation reading and unemployment data from the Euro Area and durable goods orders from the US. Several BoE policymakers including Governor Andrew Bailey will be answering questions from the UK parliament’s Treasury committee.