Euro, pound advance versus dollar
The euro and sterling have advanced further against the dollar as they continue to recover from last week’s lows. They are trading at about $1.0410 and $1.2540 respectively this morning, with EURGBP hovering around the £0.83 level. A newspaper report that Trump’s tariffs would be targeted at specific sectors/products rather than applied to all US goods imports (as promised during the election campaign) weighed on the dollar during yesterday’s session, though the report was dismissed by Trump himself. More generally, some narrowing of Euro area and UK (short-dated) bond yield differentials relative to the US is providing support to the single currency and the pound.
In government bond markets, US 2-year yields have edged down since the end of last week while equivalent German and UK yields have both nudged higher (and are up around 10bps and 5bps respectively since end-2024), with 10-year yields slightly higher across all three. In equity markets, European stocks chalked up solid gains yesterday, while the S&P 500 closed in the black albeit off its best levels of the day.
Fed member Cook, in a speech yesterday, said the “labour market has been somewhat more resilient, while inflation has been stickier” than she had expected, hence she believes the central bank “can afford to proceed more cautiously with further (interest rate) cuts.” She also noted that “all along, I envisioned moving more quickly in the early stages of our easing campaign and then easing more gradually as the policy rate came closer to neutral”, adding that she still thinks “it will likely be appropriate to move the policy rate toward a more neutral stance.”
Headline inflation in Germany accelerated to 2.9% last month from 2.4% in November according to yesterday’s flash reading, while data released a short while ago showed inflation in France ticking up to 1.8% from 1.7%. Headline inflation in Spain and Ireland also picked up in December, according to data published last week.
Looking to today’s Euro area inflation flash reading, the consensus expects headline inflation to nudge up to 2.4% in December from 2.2% in November, while core inflation is expected to remain at 2.7% for a third month in a row. Euro area unemployment for November is also due today, while the ISM services index (December) and job openings (November) are scheduled in the US.