Euro sharply lower

The euro has sold off quite sharply following the EU-US trade deal reached over the weekend, amid much criticism from European business and elsewhere of the lopsided nature of the agreement (which ‘favoured’ the US), with the single currency falling to under $1.1550 against the dollar (from over $1.17) and to about £0.8650 against sterling (from over £0.8750). At the same time, the dollar advanced against a broad range of currencies, including the pound, building on the gains it made over the latter part of last week, perhaps reflecting some relief that the US is reaching agreements with important trading partners after the chaos of the last number of months. Whether the US currency – which is now at a circa 1-month high against the euro and around 3 cents off its early July lows of circa $1.1850 – can extend its advance in the short-term remains to be seen, but it does have to navigate a whole raft of important US economic data – including GDP, inflation and payrolls – as well as the Fed meeting – over the next few days.

European equity markets reversed course during yesterday’s session, giving up early gains of over 1% to end marginally lower overall, with the DAX in Germany a notable underperformer, closing down around 1%. US stocks also retreated from their best levels to finish broadly flat. In government bond markets, Euro area yields nudged down a little, with German 10-year yields 3bps lower, only partially reversing the post-ECB meeting increase at the end of last week,  while US  and UK yields were a touch higher on the day.

ECB member Kazimir says the central bank is in a “comfortable place” regarding the current stance of monetary policy, having cut the deposit rate by 200bps over the past year, adding that he doesn’t “expect anything significant to happen that would force us to act (on rates) as soon as the next meeting in September.” The market has priced back in a few bps more of policy easing following the weekend trade deal but it’s still not expecting another full quarter-point reduction in rates in the current cycle.

Looking to the day ahead, there’s quite a heavy schedule of second-tier US economic data including job openings, consumer confidence, house prices and the trade balance. Mortgage approvals and consumer credit data are due in the UK, while the ECB publishes its latest survey of consumers short- and medium-term inflation expectations. The Fed commences its two-day monetary policy meeting as well.