Euro, pound edge higher

There has been a muted market reaction to Iran’s attack on Israel over the weekend – perhaps due to attempts by the US and G7 to de-escalate the situation and indications from Israel that there won’t be an immediate retaliation – with little change in oil prices and no flight to bond markets or to safe haven currencies, though markets are likely to be nervous about future developments in the region.

In currency markets, the euro and sterling are edging higher against the dollar this morning, after both shed about 2 cents last week largely in response to stronger than expected US inflation data, trading at around $1.0650 and $1.2470 respectively. This leaves EURGBP little changed at 85.4p.

German bonds led a decline in sovereign yields on Friday – after they had backed up over the course of last week – as the market priced in a bit more by way of expected ECB rate cuts this year, with 2- and 10-yields both down around 10bps on the day. Bonds also benefited from a sell-off in equity markets, which were under pressure on the back of mixed company earnings results in the US and amid reports that Iran would launch an attack on Israel, with the S&P 500 shedding almost 1.5%.

Oil prices are actually a little lower this morning with Brent crude dipping back below $90 per barrel. They have been trending higher in 2024 though – they are up around 17% since the end of last year – partly reflecting increased geo-political tensions, and will remain sensitive to developments in the Middle East particularly.

ECB member Villeroy says “bar a surprise, we should decide on the first (interest rate) cut at our next meeting on June 6,” adding that “our early June cut will have to be followed by other cuts by year-end.” He also says a return to the very low or even negative interest rates that prevailed between 2015 and mid-2022 is unlikely.

There’s a heavy enough schedule of economic data due this week, with US retail sales and industrial production in the US today and tomorrow respectively and labour market, CPI inflation and retail sales reports in the UK on Tuesday, Wednesday and Friday respectively.