Main currency pairs little changed

The main currency pairs largely treaded water yesterday with a slight weakening bias to the euro against the dollar and sterling and the latter holding its own against the US currency. This morning’s CPI data in the UK – which showed  a further increase in headline inflation in January – were broadly in line with expectations and have had little impact on the pound, while Trump’s latest tariffs warning – 25% tariffs on autos, chips and pharmaceuticals – delivered last night has left markets unmoved for the most part. The euro is trading at about $1.0450 and £0.8280 against the dollar and sterling respectively this morning, while the pound is hovering just above the $1.26 level against the dollar.

In bond markets, US yields played catch-up with Monday’s increase in yields elsewhere (US markets were closed at the start of the week) with benchmark 10-year yields ending about 7bps higher, while equivalent UK and German yields were marginally higher to flat on the day. In equity markets, European stocks chalked up further albeit modest gains, while the S&P 500 added about 0.3% to close at a new record high.

This morning’s CPI release in the UK showed the annual rate of headline inflation rose to 3% in January (from 2.5% in December), a touch above the consensus forecast, while core inflation (which excludes energy and food prices) increased to 3.7% (from 3.2%), in line with expectations. Core goods inflation picked up for a fourth month running to 1.6%, while core services inflation reaccelerated to 5% (from 4.4% in December) largely as a result of a smaller decline in airfares this January than in January 2024. According to its latest forecasts, the Bank of England expects headline inflation to reach 3.8% by the third quarter of this year (mainly due to higher energy prices) before starting to fall back again by year-end, which is why it has clearly indicated that it is adopting a gradual approach to lowering interest rates.

Fed member Daly says monetary policy “needs to remain restrictive until we see that we are really continuing to make progress on inflation,” adding that there’s “no reason to be discouraged about the progress on inflation, it just is going to take longer than anyone wants.” Her comments echo those of other colleagues and indicate the Fed remains in no hurry to lower interest rates.

It is quiet for the rest of the day in terms of economic data, with housing starts in the US the only release of any note, while the Fed publishes the minutes of last month’s monetary policy meeting.