Euro softer at the off today
The dollar fell by around 1.5 cents and 2 cents against the euro and sterling respectively last week, amid the first weekly decline in US bond yields since the presidential election in early November. The single currency is struggling at the start of play today though – trading down at around $1.05 and £0.8280 against the dollar and the pound respectively – as markets focus on the political situation in France, where the minority government is seeking to a avoid a vote of no confidence over its plans for next year’s budget. Sterling is a touch softer against the US currency this morning, trading just below $1.27. There are some important US economic data scheduled for this week, which is bookended by the ISM manufacturing index today and the jobs (payrolls) report on Friday.
US government bond yields fell quite sharply last week with 2-and 10-year yields both declining by the best part of 25bps. There were more modest falls in German and UK 2-year yields, of around 5bps or so, while 10-year yields ended around 15bps lower on the week. In equity markets, the S&P 500 added 0.5% on Friday, taking its gains for the month of November to 5%, while European stocks added around 1% but finished lower on the month overall.
Friday’s Euro area inflation data were broadly in line with the consensus forecast and keeps the ECB well on track to cut interest rates again later this month. As expected, headline inflation nudged up to 2.3% in November from 2% in October, while core inflation was a little lower than expected, remaining at 2.7%. The market fully expects the ECB to lower the deposit rate by 25bps to 3% at its meeting on the 12th, and sees about a 20% chance of a 50bps reduction.
ECB Chief Economist Philip Lane says “the European economy has been running below trend for a while now”, while he expects Euro area inflation “to transition…to a more sustainable neighbourhood of 2%” during the course of next year as services inflation comes down some more.
Looking to the day ahead, as mentioned the ISM manufacturing index is due in the US, while the unemployment rate for October is scheduled in the Euro area. Also, final PMI manufacturing readings for November are due in the main economies.