EURUSD lower again
A combination of firming ECB rate cut expectations and concerns about developments in the Middle East weighed on the euro yesterday. The single currency fell to lows of around $1.1045 and £0.8310 against the dollar and sterling respectively, but has since partially recovered to around $1.1070 and £0.8330. The pound also lost ground to the dollar, falling to an intra-day low of about $1.3240, but it too has partially rebounded to trade at around $1.3290 this morning.
The same combination of firming ECB rate cut expectations and geo-political concerns also contributed to a notable decline in German bond yields, with 10-year yields ending almost 10bps lower yesterday (though they are edging up a touch this morning). Equivalent UK and US yields also finished lower on the day, by around 5-6bps. The ‘risk-off’ environment triggered by Iran’s attack on Israel weighed on equity markets, with European and US stocks shedding around 1%.
Not surprisingly, events in the Middle East are having an impact on the oil price. Brent crude has risen to just over $75 per barrel, from just under $72 p/b at the end of last week, though this is still below the average of around $82 p/b for the year to date.
Yesterday’s CPI data in the Euro area were broadly in line with market expectations. The annual rate of headline inflation fell to 1.8% in September – below the 2% target – from 2.2% in August, while the core rate edged down to 2.7% from 2.8% (with core goods inflation unchanged at 0.4% and core services inflation nudging down to 4% from 4.1%).
ECB member Rehn has said that falling inflation means there “are more grounds for lowering rates at our October meeting”, with the “recent weakening of the Euro area’s growth prospects (tilting) the scales in the same direction.” The market is all but pricing in a quarter-point cut at this month’s meeting (17th) and fully expects another 25bps cut at the ECB’s final meeting of the year in December.
The latest economic data in the US were something of a mixed bag. Job openings rebounded in August (though they are still trending downwards), while the ISM manufacturing index came in a little below expectations but in any case remained firmly in contractionary territory at 47.2. The Atlanta Fed puts the current run-rate for GDP growth in Q3 at 2.5%, a little lower than the Q2 outturn of 3%.
It is quiet enough on the economic data front today, with the ADP employment report due in the US – ahead of the official jobs report on Friday – and unemployment in the Euro area. There are also a number of ECB and Fed members due on the wires over the course of the day.