Euro lost ground last week
The euro lost out against the dollar last week despite the ECB’s hawkish hold on Thursday, where they warned of upside risks to inflation and the market pricing in a 90% chance of a 25bps hike at their next meeting. That wasn’t enough to offset the impact of continued safe-haven demand for the dollar amid the tensions and conflict in the Middle East and concerns that energy prices will stay elevated for longer and damage Euro Area growth prospects. The euro started off last week at $1.1440 but ended Friday at just below $1.1380, however news of a pause in US strikes against Iran has helped the euro this morning and it has returned to back above $.1.14 currently. A new UK Prime Minister did little to help sterling, which lost some ground to the euro and dollar last week. It’s trading at 85.4p to the single currency and around $1.3350 to the American currency.
Government bond yields edged lower on Friday, but that was following rises during the week as markets firmed up expectations of interest rate hikes amid the fallout from the war in Iran and rising energy prices. US 10-year yields were down 2bps for the day but up 13bps for the week to 4.68%. Similarly, at the shorter end of the curve, 2-year US yields were up 15bps for the week to 4.33%. In Europe, 10-year bund yields were down 3bps on Friday but up 5bps overall for the week at 3.17%, while UK 10-year gilt yields were down 7bps on Friday but still up 8bps for the week and at 5.03%, having closed above 5% for the first time since May. Bonds are, however, rallying this morning on the hopes for a ceasefire in the Middle East with yields down on both sides of the Atlantic. It was a mixed week for equities, with the S&P recovering from a dip on Thursday to close up on Friday but nevertheless losing 0.6% for the week, its second consecutive weekly fall. The concerns over the financial sustainability of AI and related capital expenditure remains the driver, with the NASDAQ down 1.6% for the week, its third weekly fall in five weeks, and now down 8% from its early June peak.
Oil prices saw further gains last week amid the escalating conflict in Iran with Brent crude back above $100 a barrel at one point for the first time since mid-May, but there is more positive news this morning with the US having paused strikes against Iran for a second night and Iranian signaling they are holding back on retaliation. Brent has fallen back as a result and is trading this morning at just under $91/barrel but the situation remains fluid with a lasting peace in the conflict still far from secure at this point.
The flash PMIs for July in the Euro Area and UK surprised to the upside. The composite for the Euro Area came in at 51.9, up from 50.1 in June, while the UK composite rose to 52.1 from 50.3. In both economies, manufacturing and services are in expansionary territory and getting back to levels not seen since before the Iran war, while new orders and incoming business readings also improved. The US PMI was also positive, with the composite rising to 53.6, the highest in eight months, with services rising to 53.6 helped by World Cup activity. Manufacturing, at 53.8, also pointed to expansion but was slightly under the consensus forecast, while indices associated with prices – prices charged and output prices – picked up notably to the highest readings seen since August 2022.
Big week for monetary policy watchers this week following the ECB staying on hold last week, as we have the Federal Reserve FOMC conclusion on Wednesday. A hold is expected, with about a 35% chance of a hike, but we may see more hawkish noises from them – or maybe less noise of any kind as new Fed Chair Warsh favours less rather than more communications. We get the Bank of England MPC on Thursday; again, a hold is expected with only a 5% chance of a hike, while further afield the BOJ meets on Friday with a less than 5% chance of a move from them either, but the market is watching for any hawkish signal. On the data front, we get preliminary Q2 GDP data in the US and Euro Area, and PCE in the US, and flash inflation for July in the Euro Area.