Euro on the back foot
The euro resumed on the back foot on Friday, following a brief respite on Thursday, with its slide accelerating during the course of the afternoon. It has fallen to a fresh post-US election low of $1.0680 against the dollar, and has slipped to a new 2024 low of just under £0.8290 against sterling. The pound also lost some ground against the dollar on Friday and is trading a touch below $1.29 this morning. Looking to the week ahead, the key release is the October CPI report in the US on Wednesday. While the market expects another relatively benign set of data, higher than expected inflation would feed into the prevailing narrative about the impact of Trump’s prospective policies and so would probably see the dollar extend its gains.
In government bond markets, US 2-year-yields nudged up on Friday to end slightly higher on the week as whole, while equivalent German yields edged down to finish slightly lower overall, reflecting the markets’ assessment that Trump’s victory means the Fed is likely to cut interest rates by a bit less and the ECB by a bit more than would have been the case otherwise. UK 2-year yields were largely flat on the week with expectations regarding Bank of England (BoE) rate cuts little changed.
US equity markets rallied strongly post Trump’s election victory, with the Dow Jones, S&P 500 and Nasdaq all closing at new record highs on Friday on the back of weekly gains of 5-6%. European stocks struggled in contrast, shedding more than 1% on the week.
ECB member Holzmann said over the weekend that, “as things currently stand, there’s
nothing that would speak against” the central bank lowering interest rates in December. The market fully expects the ECB to lower the deposit rate by 25bps to 3% next month and sees it cutting it to around 2% by the middle of next year.
There’s quite a heavy schedule of economic data over the week ahead including Euro area GDP (Q3, second estimate), employment and industrial production; third-quarter GDP and labour market reports in the UK; and CPI, producer prices, retail sales and industrial production in the US.