Euro under pressure at the off

The euro and sterling both rose against the dollar for the first week in five last week, as the latter came under some pressure amid a sell-off in semiconductor stocks, gaining around half a cent and one cent respectively The euro is a touch weaker this morning though, related to the widespread violence seen in France over the weekend, dipping to around $1.1210 against the US currency and to around £0.8420 versus sterling, while the pound continues to trade north of $1.33 against the dollar. For the week ahead, the main economic data releases are in the UK, with the labour market report for August due tomorrow (Tuesday) and CPI inflation for September on Wednesday. Stronger than forecast data would reinforce market expectations for a Bank of England rate hike at next month’s meeting (Nov 5) and lend some support to the pound, while weaker than forecast outturns might see it give up some of its recent gains against the euro. Looking further ahead, the prospects for sterling will partly depend on whether the BoE delivers the quite aggressive series of rate hikes – 100bps in total over the next 9-12 months – currently priced in by the market.

French bonds are under pressure this morning  on the back of the weekend’s events, with 10-year yields almost 5bps higher and spreads over equivalent German bonds widening out by 6-7bps. Yields generally were lower last week, with US bonds chalking up the largest declines – of the order of 17bps in the case of benchmark 10-year yields – amid a sell-off in US stocks. The latter saw the Nasdaq shed almost 5%, as semiconductor stocks tumbled, while the S&P 500 fell by almost 2%. European equity markets outperformed last week, with the Stoxx Europe 600 gaining more than 2%, though they have opened lower this morning, off almost 1% with the French CAC more than 1% lower.

ECB President Christine Lagarde says the “inflation outlook points to higher inflation ahead, especially in the short term, given the latest developments in energy markets, though we see no evidence at this stage of significant pass-through of energy prices to other prices and wages, beyond what we have already included in our projections.” She also notes that “financing conditions have tightened, with long-term interest rates rising notably since our last meeting (which) will slow growth and reduce pass-through by more than projected in our September exercise”, but reiterates that the energy shock is too large to “look through” and that “a measured (monetary policy) response remains appropriate to keep inflation in check.” This is consistent with current market pricing for another hike in the deposit rate by the end of this year (at the next but one meeting in December).

For the week ahead, as mentioned, UK economic data releases include the labour market and CPI inflation reports on Tuesday and Wednesday respectively, while flash PMIs for October are due in the main economies on Friday.  A number of ECB members are scheduled to speak over the next few days, as are BoE members Bailey and Greene.