Euro remains on the front foot
The ECB cut the deposit rate by 25bps to 2.5% at yesterday’s meeting, as expected, and said it is now at a ‘meaningfully less restrictive’ level, pointing to the possibility of a slower pace of rate cuts ahead. The euro traded up to an intra-day high of just over $1.0850 following the meeting, which is where it more or less remains this morning. It is also close to yesterday’s best levels against sterling, at about £0.84, while the pound is trading above $1.29 against the dollar. Today’s jobs report in the US is an important release. Weaker than expected data will add to concerns about the outlook for the US economy, evident in the slide in equity markets, and would almost certainly see the dollar extend its recent decline. Stronger than expected data, on the other hand, would help to allay some of those concerns and would probably see the US currency regain some ground.
German bond yields continued to head north yesterday, though they finished off their highs of the day, with the increase in yields concentrated mainly at the longer end of the curve (10-year yields were up another 5bps or so). UK and US yields, in contrast, ended slightly lower on the day. In equity markets, European stocks recovered some more ground, adding around 0.5%, but the main US indices all sold off with the Nasdaq finishing down almost 3%. The US administration has announced a broadening of good imports from Canada and Mexico to be exempt from tariffs (at least temporarily), though this didn’t do anything to help sentiment in Asian equity markets overnight while European stocks have opened lower this morning.
The ECB’s 25bps cut in the deposit rate to 2.5% brought the cumulative reduction since June last year to 150bps. As a result the stance of monetary policy is now ‘meaningfully less restrictive’, according to the ECB, which suggests it may slow the pace of rate cuts ahead as it navigates its way towards a more neutral setting for rates and potentially the end of the current cutting cycle. The market sees some chance that it will leave rates on hold at next month’s meeting, only pricing in a full quarter-point reduction for the next but one meeting in June, and sees rates being cut by slightly less than 50bps in total over the remainder of this year. All of that said, the ECB lowered its forecasts for Euro area growth once again and, with the economic outlook clouded by heightened levels of uncertainty, it reiterated that it would make its interest rate decisions on a meeting-by-meeting basis.
Today’s employment report in the US is expected to show the economy added 160k jobs in February (following +143k in January), according to the consensus forecast, with the unemployment rate and y-o-y wage growth both forecast to remain steady at 4% and 4.1% respectively. Elsewhere, a final estimate of GDP growth in Q4 2024 is due in the Euro area- the previous estimate showed the economy grew by just 0.1% from the third quarter of the year.