Euro off its lows

The euro has recovered from its lows of under $1.09 last Monday to trade close to $1.10 against the dollar at the start of play this Monday, with generally soft economic data out of the US last week weighing on the latter.  The pound has given up a little ground to the single currency – to trade at over 89p – after the European Commission casts doubt on UK proposals to replace the backstop

There was a notable decline in US bond yields in particular last week – of more than 15bps (to almost 1.50%) in the case of benchmark 10-year yields – again on the back of the soft economic data –  with much more modest declines in both German and UK yields

The economic data out of the US indicate that the manufacturing sector is contracting and activity in the services sector is slowing, while Friday’s “payrolls” report  showed employment growth moderating albeit still running at a pace sufficient to keep intact the downward trend in the unemployment rate, which fell to a circa 50-year low of 3.5% in September. While Fed Chair Powell reiterated over the weekend that the economy is in a ‘good place’, the market fully expects the central bank to cut interest rates by 25bps later this month and is attaching a very high probability to another quarter point reduction in December

The EU has said the UK’s proposals to replace the backstop do not provide the basis to conclude an agreement. While discussions between the two sides will continue, it remains to be seen if any agreement can be reached in time for the European Council meeting on 17th-18th October, with some media commentary suggesting the EU is looking beyond the latter to an extension of Article 50 and a probable election, after which it will assess the lie of the land

At home, Budget 2020 will be presented tomorrow. This is being framed on the assumption of a ‘no deal’ Brexit on 31st October, and so will contain measures aimed at helping those sectors most exposed to such a UK departure from the EU, if that is what transpires

Data due this week include GDP in the UK and CPI inflation in the US, both on Thursday