Euro & sterling gain more ground v $

The euro and sterling have gained some more ground on the beleaguered dollar although both have retreated from yesterday’s best levels to trade at around $1.1120 and $1.3020 this morning (and remain shy of their previous respective highs of circa $1.1150 and $1.3050 in December 2023 and July this year). With both moving almost in lockstep against the US currency, there’s not much change in EURGBP which is currently trading at around £0.8540.

Equity markets took a breather yesterday, having chalked up solid gains over the course of last week and the start of this week, with European and US stocks both closing marginally in the red. In government bond markets, yields were lower, led by a decline in US yields, which fell by 6-7bps in the case of 2- and 10-year yields. US yields have fallen quite sharply relative to German and UK yields in recent weeks as expectations for Fed rate cuts have built, which has been reflected in a weaker dollar.

ECB member Rehn has said “an increase in negative growth risks in the Euro area has reinforced the case for a rate cut at the next ECB monetary policy meeting in September, provided that disinflation (remains) on track.” The market fully expects the ECB to lower rates by 25bps next month and is pricing in a further 67bps worth of cuts over the final quarter of the year.

While the Euro area economy expanded again in the second quarter, the German economy contracted slightly (GDP fell by 0.1%). The Bundesbank, the country’s central bank, expects the economy to avoid recession though, according to its latest monthly report published yesterday, with GDP forecast to “increase slightly in the third quarter”, although it says “this means that the expected economic recovery will be further delayed.”

Regarding the day ahead, the Fed publishes the minutes of its July monetary policy meeting, at which it left interest rates unchanged but indicated a cut was likely in September. On the data front,  revised non-farm payrolls data for the year to March 2024 in the US are expected to show the level of employment over this period was substantially lower than initially estimated.