Euro, pound retreat from highs vs dollar

Taking their cue from the Japanese yen – which rose against the dollar following signals from the Bank of Japan (BoJ) that it may raise interest rates this month – the euro and sterling traded up to highs of around $1.1650 and $1.3275 respectively against the US currency yesterday. However, much like the yen, they were unable to sustain these gains, despite weaker than expected US economic data, falling back again to finish little changed on the day at around $1.1615 and $1.3215 (which is where they are trading at the start of play today). EURGBP is marginally firmer, trading at about £0.8790. A flash reading for Euro area inflation in November is due this morning, but this shouldn’t have much of an impact on the euro.

US and Euro area government bond yields spiked higher, in tandem with a jump in Japanese bond yields (also related to BoJ rate-hike speculation), with 10-year yields rising by 6-8bps on the day. Equivalent UK yields also rose, reversing some more of their post-budget fall over the second half of last week, increasing by around 4bps. Higher bond yields weighed a little on equity markets, which gave up some of last week’s gains, with the S&P 500 in the US off around 0.5% and European stocks around 0.2% lower.

Manufacturing activity in the US remains in contraction territory according to the last survey from the Institute for Supply Management (ISM). The headline index fell further below the key 50 level in November, with notable declines in both new orders and employment. Manufacturers’ input costs continue to rise at quite a sharp clip, partly related to higher tariffs.

Ahead of the ECB’s meeting later this month, its Vice-President, de Guindos, says the “current level of interest rates is appropriate,” noting that “the markets are pricing in stability, with no rate increases or decreases in the coming months.” He does add though that, “given the level of uncertainty and unknowns in the international geopolitical environment, we are open to adjusting” interest rates if it proves necessary.

According to the consensus forecast, today’s Euro area flash CPI data for November are expected to show headline and core inflation were both unchanged last month, at 2.1% and 2.4% respectively. Euro area unemployment data are also due today, with the unemployment rate expected to have remained close to a record low of 6.3% in October.