Euro gives up some ground

The euro has given up some ground against both the dollar and sterling, after data showing inflation in the Euro area came in lower than the market expected in October, and is trading at around $1.0560 and 86.9p respectively this morning. The pound, meanwhile, is largely unchanged against the dollar at $1.2150.

Euro area sovereign bond yields were flat to marginally lower yesterday, as the inflation data reinforced prevailing market expectations that the ECB is done raising interest interest rates and will begin lowering them during the second quarter of next year,  while US and UK yields were also little changed on the day.

Inflation in the Euro zone fell to 2.9% in October, according to the flash reading, below the consensus forecast of 3.1% and down from 4.3% in September, largely reflecting a deceleration in both energy and food price inflation. Core inflation – which excludes food and energy prices – saw a more modest fall and remained relatively high at 4.2% (after 4.5% in September), though the weakening Euro area economy – separate data published yesterday also showed GDP contracted slightly in Q3 – will continue to dampen price pressures.

House prices in the UK rose for a second month in a row in October according to the Nationwide index, increasing by 0.9% after a gain of 0.1% in September, while the year-on-year pace of decline eased to -3.3% (from -5.3%). Nationwide notes, though, that “house prices are likely to remain subdued in the coming quarters” amid stretched affordability, weak consumer confidence and low levels of new buyer enquiries.

There was a mixed bag of economic data in the US yesterday. Consumer confidence fell for a third consecutive month in October according to the Conference Board, which may presage slower consumer spending ahead, while the employment cost index rose by a larger than expected 1.1% in Q3 and was 4.3% higher than in Q3 last year. The latter was down from 4.6% in Q2 but still above the pace of increase consistent with inflation returning sustainably to 2%.

The Fed announces its latest interest rate decision later today and looks set to keep interest rates on hold for a second consecutive meeting. In a speech in mid-October, Fed Chair Powell reiterated that, given the extent to which policy has been tightened to date, the central bank “is proceeding carefully” regarding any further increase in rates. This is the same language he used ahead of the decision to pause hikes in September, suggesting the Fed will also keep rates unchanged today.

There are a number of US economic date releases due today as well, including job openings, the ADP employment report, and the ISM manufacturing index.