Euro, sterling resilient versus dollar
The euro and sterling were relatively resilient against the dollar yesterday, revisiting and (in the case of the pound) breaching Monday’s highs. They have come back a little since to trade at around $1.0410 and $1.2330 respectively this morning, with EURGBP once again largely unchanged in and around £0.8450. In its first couple of days in office, the new US administration has said it will “tariff and tax foreign countries” (and threatened tariffs on Mexico and Canada from February 1st ) – risking a “trade and tax war” – so markets will now have to await developments on this front.
UK bonds outperformed yesterday as market expectations for Bank of England rate cuts firmed a touch (likely in response to the uptick in UK unemployment reported in the latest labour market data), with 2- and 10-year yields both falling by around 6bps (the latter are now down around 30bps from their peak at the height of the ‘tantrum’ in UK markets a week ago). Equivalent US yields were flat and 5bps lower respectively, while German yields were largely unchanged on the day. In equity markets, European stocks ended flat yesterday but US indices added around 1%, while Trump’s AI announcement may provide a fillip to stocks today.
ECB member Villeroy says it’s “plausible” the central bank continues to lower the deposit rate (currently 3%) at “each meeting “ as it moves to a neutral level for interest rates (generally considered to be around 2%), adding that “If we are decisive enough about this pace of the cuts, we don’t need now to increase the magnitude of the cuts” (suggesting the ECB will continue to move in 25bps steps).
The latest public finances data in the UK show public sector net borrowing was £17.8 billion in December, £10.1 billion more than in December 2023 (and the highest December borrowing for four years) and ahead of the Office for Budget Responsibility (OBR) forecast of £14.6bn. Borrowing in the financial year to December 2024 (i.e. April-December) was £129.9 billion, £8.9 billion more than at the same point in the last financial year and ahead of the OBR forecast of £125.9. The OBR will publish a revised outlook for the UK economy and the public finances in March.
It’s another very quiet day ahead in terms of economic data, with little or nothing of note scheduled for release.