Main currency pairs little changed

It was relatively uneventful in markets yesterday. In FX, the euro and sterling dipped to lows of the day of around $1.1530 and $1.3260 against the dollar respectively before rebounding following softer than expected US economic data. They are trading at about $1.1575 and $1.3290 this morning, not far shy of the highs they posted following Friday’s jobs data in the US. EURGBP is little changed, hovering in and around the £0.87 level.

There were limited moves in government bond markets. US 2-year yields nudged up by 5bps, having fallen by some 30bps following the US jobs report, while 10-year yields were marginally higher on the day. Elsewhere, German and UK yields ended broadly flat. In equity markets, European stocks chalked up very modest gains (+0.2%), while the Nasdaq led US indices lower, shedding around 0.7%.

The ISM services index in the US came in weaker than expected in July. It fell to 50.1 (versus a forecast of 51.5) from 50.8 in June, consistent with little or no growth in this sector of the economy. Moreover, employment contracted again last month and at a faster pace than in June. At the same time though, input costs rose again and more quickly than in previous months, highlighting the dilemma facing the Fed as it grapples with weakening economic activity on the one hand but increased inflation pressures on the other.

Outgoing ECB member Holzmann believes “there is…no reason to lower interest rates” at the next monetary policy meeting in September, saying the central bank should “wait and see what economic developments arise…and how we respond to them.” The market currently sees about a 60% chance of another (25bps) rate cut by the end of this year.

It’s a quiet day ahead in terms of economic data with retail sales for June due in the Euro area and the construction PMI for July scheduled in the UK.