Main currency pairs little changed

There was some very modest relief for US government bonds yesterday as yields edged lower, but European yields continued to head north. Equity markets fell for a second day running, while Asian stocks were lower in overnight trading (Japan’s Nikkei index was off more than 3%). The main currency pairs are not much changed however. The euro continues to hover just below the $1.16 level against the dollar, while sterling is trading at about $1.3550 against the US currency, leaving EURGBP still around the £0.8550 area. UK CPI inflation data for July released a short while ago were broadly in line with the consensus forecast and so are having little impact on the pound.

While US government bond yields edged down by a couple of basis points, German yields rose by 3-5bps, led by the short-end of the curve amid a modest firming of ECB rate hike expectations. UK bonds treaded something of a middle path between the US and Germany with yields marginally higher on the day. In equity markets, the Nasdaq and S&P 500 fell by 1.3% and 0.7% respectively, while European stocks shed around 1%. Asian stocks were on the back foot overnight, with the Nikkei index in Japan down more than 3%.

UK CPI inflation data for July released a short while ago were broadly in line with expectations. The headline rate of inflation picked up to 2.9% last month, from 2.6% in June, reflecting an increase in energy price inflation. Food inflation fell again last month though (to 1.2%), while core inflation – which excludes both energy and food prices – was unchanged at 2.6%, with an increase in core goods inflation (to 0.9%) offset by a decline in services inflation (to 3.4%). Notwithstanding the war in Iran (now in its sixth month), headline inflation is running slightly lower than in February this year, when it stood at 3%, while core inflation has fallen from 3.2% over the same period.

For the day ahead, economic data due include labour costs (Q2) and a final reading for July CPI inflation in the Euro area, while the Fed publishes the minutes of its July monetary policy meeting, at which 3 of 12 members voted for a 25bps hike in interest rates.