Euro regains ground

The euro has regained ground against the dollar following yesterday’s firmer than expected Euro area inflation readings for January and is not far shy of $1.09 this morning. Sterling has also rebounded against the US currency, trading back at around $1.2750, after the Bank of England left interest rates unchanged at its latest meeting and indicated it was in no hurry to begin lowering them. All of this sees EURGBP once again little changed at about £0.8530.

In bond markets, US 10-year yields have extended their post-Fed meeting decline, dipping below 3.90%, while equivalent German and UK yields are edging higher this morning reversing yesterday’s modest falls. In equity markets, US stocks had a decent enough session, gaining around 1%, while European stocks have opened higher this morning having ended marginally lower yesterday.

The Bank of England’s MPC left interest rates unchanged, as expected, though there was a three way split, with six members voting to stay on hold, two favouring a 25bps hike and one preferring to cut by 25bps points. The MPC dropped its tightening bias, with its Governor, Andrew Bailey, saying “it is most likely that this year’s questions for the MPC are “for how long should we keep Bank Rate at its current level (of 5.25%)?” and “have inflationary pressures eased enough that we can begin to lower Bank Rate or not?” The market has pared back the chances of a May cut (to just over 50/50) but is still pricing in a full quarter-point reduction in June.

Yesterday’s Euro area inflation readings surprised to the upside with the headline and core rates coming in at 2.8% and 3.3% respectively in January (from 2.9% and 3.4% in December). Among the largest economies, declines in headline inflation in Germany and France were countered by increases in Italy, Spain and Netherlands.  Within core inflation, services inflation – which the ECB is concerned about – remained sticky last month at 4%.

The key economic data release today is the January employment (payrolls) report in the US. The consensus expects the economy to have added 185k jobs last month with the unemployment rate seen ticking up to 3.8% and year-on-year hourly earnings growth remaining at 4.1%. With the latest round of central bank meetings now out of the way, the report could see the tone for markets for the next while.