Main currency pairs little changed

There has been a muted reaction in FX markets to yesterday’s inflation reading in the US, which came in firmer than expected for a second month running in February, with the main currency pairs largely unchanged. The euro and sterling are currently trading at around $1.0950 and $1.28 respectively, leaving EURGBP still hovering in and around £0.8550.

The inflation data contributed to a modest increase in US bond yields, which rose by around 5bps yesteday, with some spill-over to German and UK yields (albeit the latter still ended slightly lower on the day). Equity markets ignored the data as US and European stocks chalked up gains of around 1%, more than reversing their declines over the previous two sessions.

ECB member Villeroy says the “risk of waiting too long before loosening monetary policy and unduly hurting the economy is at least as equal to acting too soon and letting inflation rebound,” adding that “there’s a very broad consensus to cut rates in the spring, bearing in mind that spring lasts until June 21”. Also bear in mind that the next but one meeting of the ECB is June 6!

The annual rate of headline CPI inflation in the US nudged up to 3.2% in February (from 3.1% in January) on the back of a 0.4% increase in prices on the month, while the annual rate of core inflation edged down to 3.8% (from 3.9%) with prices on this measure increasing by 0.4% for a second consecutive month. The data are likely to give the Fed some pause for thought, and won’t have added to its “confidence” that inflation is heading sustainably towards 2%.

GDP in the UK rose by 0.2% in January according to the monthly data released earlier today, more than reversing a fall of 0.1% in December, while over the three months to January the pace of decline in output eased to -0.1% from -0.3% in the three months to December. On an annual basis, GDP in January was 0.3% lower than in the same month in 2023.