Euro retakes a little ground

The euro lost some ground last week but kicked off this week making some small gains. There was little news – political or otherwise – in Europe yesterday and that helped the single currency to pick up to $1.073 to the dollar, from just under $1.07 at times on Friday. Against sterling, it ticked up to 84.5p from 84p on Friday. While there is some economic data out this week, that may not be enough to move the dial too much for the euro and it remains political risk that will have to be watched out for. There was little movement in the GBPUSD cross yesterday which remains around $1.27.

That more positive change in sentiment toward the Euro Area extended to equities which rebounded a little yesterday following losses last week. The Eurostoxx gained 0.9% yesterday – not enough to offset the 4% fall last week – but it is a notable change following a tough week. The French CAC bore the brunt last week and was down by 6% for the week, but gained 0.9% yesterday. In the UK, equities were flat. In the US, the tech fueled rally continued with the S&P 500 up another 0.8% to a fresh record higher of over 5470. The more risk on day saw bonds ease back with 10-year US yields up 5bps to nearly 4.3% and 10-year German yields up 5bps also to 2.4% and 10-year UK yields up a similar amount to 4.1%.

Euro area labour cost data showed the annual increase picked up to 5.1% in Q1, in line with expectations as the provisional estimate was 4.9%. While this up on the 3.4% rate in Q3, it includes a number of centralised wage agreements which kick in across swathes of Europe during the first quarter. This slight increase on the provisional numbers will not concern the ECB too much as they felt confident enough to lower rates at their June meeting but will now be keeping a close eye on incoming data as they would like wage inflation to ease back from this point onwards.

In the US, the Empire manufacturing index picked up to -6 in June from -15.6 in May. This was better then expectations but still indicates a decline in business activity. Employment was weak but prices sentiment suggest price pressures are easing. There was a sharp improvement in expected business conditions six months ahead, which picked up to 30.1 from 14.5, and suggests growing optimism about the near term outlook.

ECB President Lagarde said the Bank is being ‘attentive’ to current financial market developments though chief economist Philip Lane said he was not worried about the turbulence. Lagarde said that ‘price stability goes in parallel with financial stability’ but while the Bank was attentive to the situation it is ‘limited to that’. Chief economist Lane was more dismissive of the current situation saying the weakening of French bonds was ‘a repricing’ but not ‘disorderly’. That view was backed up by Vice President Guindos who said the movements were ‘orderly, not of extreme impact’. On balance it appears most, or at least the majority of, the ECB are not alarmed by the recent market volatility and it should not dissuade them from continuing to ease policy sometime in the second half of the year.

Philadelphia Fed President Harker said yesterday he thinks that just one interest rate cut is appropriate this year as he would like to see ‘several’ months of improving inflation to be sure that prices had been tamed. He said data that showed CPI inflation was cooling in May was ‘very welcome’ but more evidence was needed to be confident that it was heading towards the 2% target. In his view this calls for a ‘cautious approach’ and that the current interest rate will continue to ‘serve us well for a bit longer’.

Economic data due today includes ZEW sentiment in Germany, Euro Area inflation and US retail sales and industrial production. Central Bank speakers include several ECB and Fed members which includes, amongst others, Villeroy and Knot from the former and Barkin and Collins from the latter.