Euro remains under pressure ahead of ECB meeting
The euro continues to trade around $1.05 to the dollar but remains under pressure ahead of today’s ECB meeting. The single currency has held up around $1.05 since mid-November having fallen from $1.09 prior to the election of Donald Trump. There was a little respite yesterday lunchtime for the euro, where it picked up close to $1.0540, following the release of US inflation data which was in line with expectations – the last major data release before the Fed meets next week – and solidifies the market view of a US rate cut at that time. Ahead of that, the ECB meets today, with markets fully pricing in another 25bps cut – the third in as many meetings. The euro lost a little bit of ground to sterling yesterday and trades at around 82.3p this morning.
In bond markets, there was little change in German and UK ten year yields which finished up at close to 2.1% and 4.3% respectively. US ten year yields ticked up a few bps to 4.25%. All three, however, are moving up a few basis points in early trading this morning. Meanwhile in equity markets, stocks rebounded following a losing day on Tuesday. The S&P 500 gained 0.8% for the day taking it back near Friday’s record high close. The Eurostoxx moved up 0.2% while the FTSE did marginally better closing up 0.3%.
In the US, core CPI (excluding food and energy) rose 0.3% on the month in November in line with expectations. This is the fourth month in a row that core prices have increased by 0.3% while the annual change is similarly little moved at 3.3%, the same as in October. The easing back in the pace of inflation appears to have stalled in the US – which has some Fed members wondering if more gradual rate cut timing is needed – however the Fed’s preferred gauge of prices, the PCE, was 2.3% in October so the CPI inflation numbers yesterday should not be a barrier to another rate cut next week and markets remain of that view.
The UK housing market environment continued to improve in November. The RICS house price balance increased to 25% from 16% in the previous month. This is the highest it’s been since September of 2022, before the Truss budget the roiled UK markets. This survey measures activity rather than prices, but price measures are also showing annual increases in UK property prices of late. The RICS did urge some caution due to the economic outlook as confidence appears to be weakening and adding there would be headwinds to market activity in 2025 if the BoE does not cut back rates as much as markets expect.
The ECB looks certain to lower interest rates again at its meeting today, following rate cuts at both September and October meetings. Markets have fully priced in a 25bps cut taking the deposit rate to 3% and the main refinancing rate to 3.15%. Updated economic projections from the Bank’s staff are likely to show downward revisions to forecast Euro Area GDP growth, from 1.3% in 2025 currently, and also indicate inflation should return to target faster than expected as the ECB’s current forecast do not have it at 2% until Q4 of next year. That outlook will set the tone for the ECB to cut interest rates further in the early part of 2025 and, perhaps, spur debate among policy makers that not only will interest rates have to return to the neutral rate but perhaps more accommodative monetary policy will be needed to avoid inflation undershooting target given the weak economic outlook.
On the agenda today, the ECB will dominate events but also due is US PPI data and initial jobless claims and closer to home we get Irish CPI data for November.