Inflation data to the fore this week

The pound underperformed over the course of last week as market expectations for interest rate cuts in the UK next year hardened, shedding almost 1p against the euro and 1.5 cents against the dollar, and kicks off this week trading at around 87.4p and $1.2240 respectively. The euro, meanwhile, traded in a tight range against the dollar last week and is hovering just below $1.07 this morning.

UK government bond yields fell last week – bucking the trend elsewhere – with 10-year yields declining by around 5bps to 4.33%. Equivalent US and German yields, in contrast, both rose by almost 10bps to 4.65% and 2.72% respectively (with Moody’s decision on Friday to lower its credit rating outlook on the US to negative from stable having little impact on US yields).

ECB’s Lagarde says inflation in the Euro area could tick up in the near-term but says the current level of interest rates, if held for “long enough”, will help to get it down to the 2% target, while indicating that the central bank will not be lowering rates “in the next couple of quarters”.

Consumer confidence in the US fell for a fourth month running in November, according to the University of Michigan index. Inflation concerns appear to be impacting on sentiment, with expectations for the former over the next year rising for a second consecutive month.

There is a heavy schedule of economic data due this week, with the key releases the latest CPI inflation readings in the US and UK on Tuesday and Wednesday respectively. The headline rate of inflation in the US is expected to have fallen to 3.3% in October from 3.7% in  September, while UK inflation is seen posting a sharp fall to 4.7% this month (from 6.7% in September) helped by lower energy prices.