Euro retreats from highs of over $1.18

The euro rose to an intra-day high of around $1.1830 against the dollar yesterday after comments by ECB Vice-President de Guindos  – expressing little concern about the currency’s recent appreciation and saying $1.20 would be “acceptable” but above this would be “complicated” – before retreating to under $1.18 after the release of somewhat better than expected US economic data. While the comments are an invitation for EURUSD to push on to $1.20, whether it gets there in the near-term may depend on the outturn for tomorrow’s key jobs report in the US. Meanwhile, sterling is trading at around £0.8590 and $1.3720 against the euro and dollar respectively, marginally weaker than this time yesterday morning. There hasn’t been much market reaction so far to the UK government’s climbdown on a key plank of its welfare reform (and its associated savings of circa £5bn), which is again raising questions about the Chancellor’s ability to meet her fiscal targets and the credibility of fiscal policy generally.

It was a mixed day in government bond markets with US yields ending slightly higher on the back of the latest economic data but German and UK yields ending marginally lower, though yields generally are edging up this morning. In equity markets, European stocks closed lower for a second session running, while both the S&P 500 and the Nasdaq retreated a little from Monday’s record highs (although the Dow Jones advanced by almost 1%). Markets are likely to remain cautious ahead of 9 July, the end of the 90-day ‘pause’ to Trump’s reciprocal tariffs.

Yesterday’s US economic data were something of a mixed bag though on balance a touch firmer than expected. The ISM manufacturing index nudged up in June but is still signalling contraction in activity in this sector, while construction spending fell for a seventh month in a row in May. In the labour market, job openings rebounded in May, though they continued to run below year-earlier levels. All told, the data are consistent with a gradual moderation in the pace of growth in the economy, which keeps the door open to Fed rate cuts later this year.

Inflation in the Euro area was bang on target at 2% in June according to yesterday’s flash reading, nudging up from 1.9% in May. Core inflation – which excludes energy and food prices – was unchanged at 2.3%, with goods inflation dipping to 0.5% (from 0.6%) and services inflation edging up to 3.3% (from 3.2%). All of this should be enough to keep the ECB on hold at its monetary policy meeting later this month.

Looking to the day head, it’s relatively quiet in terms of economic data with unemployment in the Euro area and the ADP employment report in the US. A number of ECB members are scheduled to speak over the course of the day.