Euro holds above $1.05

The euro and sterling shed around two and three cents against the dollar respectively last week, as the latter extended its broad-based post-election gains amid a continuing rise in US bond yields. The single currency managed to remain above the key $1.05 level on Friday and is trading at around $1.0550 at the start of play this week, while the pound is trading at about $1.2630 having hit a low for the week of just under $1.26 on Friday. EURGBP firmed gradually over the course of last week (from a low of under £0.83 on Monday) and is hovering just north of £0.8350 this morning.

Rising US bond yields – as the market has pared back Fed rate cut expectations – have supported the dollar over the past couple of weeks (and indeed before). US 2-year yields increased by a further 6bps last week while 10-year yields rose by almost 15bps. In contrast, German 2-year yields fell by 6bps and 10-year yields were largely unchanged, while UK 2- and 10-yields ended a touch lower and and a little higher respectively on the week.

US equity markets lost some more ground on Friday, as they continued to trim their immediate post-election gains, with the S&P 500 shedding almost 1.5% and the Nasdaq off more than 2%. European stocks also ended the week on a soft note, losing almost 1% to end lower for a second week in a row.

There was a mixed bag of US economic data on Friday. Headline retail sales rose by more than expected in October, and September’s increase  was revised up, while manufacturing output fell for a second consecutive month in October (although part of the decline was hurricane-related).

Looking to the week ahead, flash PMIs (November) for the main economies are due on Friday, while UK CPI inflation and retail sales are scheduled for Wednesday and Friday respectively. A number of ECB, Fed and Bank of England members are speaking over the course of the week, including ECB President Christine Lagarde later today.