Main currency pairs not much changed

While oil prices rose to just over $100 per barrel at one stage during yesterday’s session  following renewed US strikes on Iran, the price action in markets was fairly muted suggesting they still expect some kind of peace deal/agreement to be reached between the two sides relatively soon. In FX, the euro is marginally firmer versus the dollar at around $1.1645, while sterling is a touch softer against the US currency at about $1.3450. The pound is also a little weaker against the euro, falling back to just over £0.8650.

US and UK government bond yields edged down (from Friday’s closing levels) as trading resumed following the long-weekend, while German yields were slightly higher on the day, reversing a small portion of the quite sharp fall seen on Monday. In equity markets, European stocks gave up some of Monday’s gains, shedding around 1%, while the S&P 500 rose by just over half a percent to close at a new all-time high.

The ECB’s Chief Economist, Philip Lane says “a further upward adjustment to the (Euro area) inflation forecast” is likely in its updated macroeconomic projections in June, while also indicating that some “limited” monetary policy response will be required. He notes that the Bank’s surveys “suggest many firms expect that they will have to raise prices,” adding that “if this develops from an energy shock into a broader inflation problem, that would be a major issue.” The market has now almost fully priced in a 25bps increase in the deposit rate at next month’s meeting.

Consumer confidence in the US dipped in May according to the Conference Board’s indicator, having surprisingly risen in both March and April, “as the inflationary impacts of the war in the Middle East intensified (and) consumer appraisals of current economic conditions and the current labour market were moderately less positive compared to last month.” While consumer sentiment has been running at relatively subdued levels recently, consumer spending has been holding up relatively well, increasing in real terms by 2.0% year-on-year in March according to the latest available data.

Looking to the day ahead, it is extremely quiet on the economic data front with the ADP weekly employment report in the US the only release of any note. There are a few central bank members (from the Fed/ECB/BoE) scheduled to speak over the course of the day, while the ECB publishes its latest Financial Stability Review.