Euro gains ground

Yesterday’s US inflation data were stronger than expected, prompting an increase in bond yields as expectations for any Fed rate cuts were pared back and pushed out, though the dollar failed to progress. Indeed the euro closed higher against the US currency on the back of potentially positive developments in relation to the war in Ukraine – Donald Trump said talks with Russia will begin “immediately” aimed at ending the conflict – and has advanced further to around $1.0420 this morning. Sterling has also gained ground against the dollar, to just shy of $1.25, helped by better than expected GDP data in the UK released a short while ago, while EURGBP is a touch firmer trading at £0.8340.

In bond markets, the stronger than forecast inflation data saw US yields end 7-8ps higher on the day, with the market now essentially expecting the Fed to cut rates just once in 2025 towards the end of the year, while German and UK yields followed some of the way higher, rising by 4-5bps. In equity markets, US indices ended in the red, but European stocks chalked up modest gains, helped by the news in relation to Ukraine. The latter also saw oil prices fall back, with Brent crude below $75 p/b this morning, down from Tuesday’s close of $77.

Regarding the US inflation data, headline and core consumer prices rose by 0.5% and 0.4% respectively in January, both ahead of the consensus forecast. This pushed up the headline rate of CPI inflation to 3% from 2.9% in December, while the core inflation rate nudged up to 3.3% from 3.2%. Fed Chair Powell said the data showed there’s more work to do to return inflation to target and said the central bank will maintain its restrictive monetary policy stance.

This morning’s GDP data in the UK show the economy expanded by 0.4% in December, stronger than expected (+0.1%), driven mainly by growth in the services sector. For Q4 (Oct-Dec), GDP grew by just 0.1%, having stagnated in the third quarter, but was up 1.4% on Q4 2023. For 2024 as a whole, GDP growth averaged 0.9%, a mild acceleration from 0.4% in 2023.

 Looking to the day ahead, producer price inflation and the regular weekly jobless claims are due in the US, while industrial production is scheduled in the Euro area. There are also a few ECB members due on the wires.