Little change in euro

With the US having a public holiday on Monday, yesterday really was the kick off to the week and saw a bit more action in markets. The euro made up a little more ground on sterling. The UK currency was softer due to yesterday morning’s weak UK employment data seeing markets price in a bigger chance of a near term cut by the Bank of England, with the single currency getting up to close to 87.5p for a time but now trading at 87.3p. While the euro lost some ground against the dollar intraday – back towards $1.18 – in a volatile session yesterday, it made back up the ground later on and was trading back above $1.1850. The euro has lost a touch in early trading this morning, back down towards $1.1830, on speculation that ECB President Lagarde will leave the post early, before the end of the year, to allow her successor to be chosen before the French Presidential elections due in the first half of 2027.

European bonds saw gains yesterday for the most part, with yields ticking down slightly across the board. German 10-year yields were down 2bps to 2.74% with 5-year and 2-year yields down about a basis point. UK, French and Italian yields all edged down yesterday. There was less downward pressure on US yields, with 10-year yields remaining around 4.05%. Yesterday’s ADP weekly employment change average in the US was a little higher than the previous week, adding little to the evidence the labour market is weakening enough to push the Fed into faster rate cuts. Bond yields in Europe and the US are, however, ticking up in early trading this morning. Equities markets saw some intraday swings, with the S&P 500 in the US down 1% at one point only to make up ground again and finish the day up 0.1%. European indices all ended the day in the green with the Eurostoxx up 0.7% and the FTSE up 0.8%.

There was a downside surprise in the ZEW investor confidence index for Germany in February. The expectations index fell to 58.3, from 59.6, but analyst’s forecasts were for a sizable increase to 65.2. The report said while the German economy was in ‘a phase of recovery’ there was ‘significant’ structural challenges particularly for industry and for private investment which continue to weigh on the outlook. That said, the German government is set to spend up to €500Bn on infrastructure, the green transition and defense in the next couple of years which should spur on a more robust recovery in growth than this survey would indicate.

Fed ‘dove’ Goolsbee said yesterday that there is the potential for more Fed rate cuts this year, if inflation falls. The Chicago Fed President, who does not vote on the FOMC this year, said that if price hikes linked to tariffs ‘proves to be be transitory’ and the Fed can see a path back to 2% inflation then Goolsbee thinks ‘there’s several more rate cuts that can happen in 2026’ but the bank has ‘got to see’ that path back to 2%. Elsewhere Fed Governor Barr disagreed with Fed Chair nominee Warsh that an AI boom would allow for non-inflationary growth and lower rates. He said that the demand for capital for AI investment would put upward pressure on interest rates while San Francisco Fed President Daly echoed this saying that AI-boosted productivity would, in theory, push up the neutral interest rate as ‘the demand for investment would rise relative to the supply of saving’.

UK CPI inflation came in at 3.0% in January. This is down from 3.4% in December and in line with expectations. Lower fuel and food prices helped to lower the annual rate last month. Core CPI inflation, at 3.1%, was a little higher than in the Bank of England forecasts. Inflation in the UK is set to moderate quite quickly from this point with the Bank of England expecting the headline rate to fall to 2% by May. This combined with the weak jobs report from yesterday mean the market is pricing in an 80% chance of a 25bps cut in interest rates at the March 19th MPC meeting.

On the agenda today, US economic data due include durable goods orders for December as well as some housing data and industrial production for January and late on, we get the FOMC meeting minutes. There are a number of ECB speakers due including Villeroy, Cipollone and Schnabel and also Bowman from the Fed.