Euro recovers some ground

The euro advanced against both the dollar and sterling yesterday, although its gains were modest, with some easing of market concern about the political situation in France (evident in a decline in French government bond yields) supporting the single currency. It is trading at around $1.1670 and £0.8650 respectively this morning, off lows earlier this week of around $1.1575 and £0.86. The pound, meanwhile, has dipped to just under $1.35 against the dollar. The focus today will be on PCE inflation data in the US, which are expected to show a tariff-related increase in underlying inflation in July.

In government bond markets, French 10-year yields fell by around 5bps with the spread over equivalent German yields narrowing by much the same (with the latter largely unchanged yesterday). US 10-year yields continued to nudge lower, falling by around 4bps (and at about 4.20% are down the best part of 20bps since the end of July), while UK yields performed broadly in line with the US.

Fed member Waller, who voted for a 25bps cut in interest rates at the central bank’s July meeting, says the argument for lowering rates “is even stronger today”. He notes that “data on economic activity, the labour market, and inflation support moving policy toward a neutral setting (which is) 125 to 150 basis points lower” than the current level of rates of 4.25%-4.50%, and says he will be voting for a 25bps cut again at next month’s meeting.

The minutes of the ECB’s July monetary policy meeting – at which the deposit rate was left unchanged at 2% – note that “most members  viewed the risks surrounding the inflation outlook as broadly balanced.”  With the Euro area economy proving “resilient”,  and interest rates now in “broadly neutral territory”, the minutes suggest policy is set to remain on hold over the coming months.

Today’s PCE inflation data in the US are expected to show the headline inflation rate remaining at 2.6% in July but core inflation nudging up to 2.9% from 2.8% in June. Other US data include consumer spending for July and consumer  confidence for August, while elsewhere, a preliminary inflation reading for August is due in Germany.