Main currency pairs little changed

The dollar and other ‘safe-haven’ currencies (Japanese yen, Swiss franc) rose for a time during yesterday’s session on the back of escalating Russia-Ukraine tensions before giving up ground again. The euro is little changed against the dollar from this time yesterday morning trading at about $1.0570, though it did briefly rebound to over $1.06, while sterling is trading just shy of $1.27, having recovered from yesterday’s low of about $1.2615, helped by slightly firmer than expected UK inflation data for October released a short while ago. All of this leaves EURGBP trading a little softer at about £0.8330 this morning.

Government bonds also rallied briefly on the back of the Russia-Ukraine situation before reversing course, with German, UK and US 10-year yields finishing off their lows though still slightly down on the day overall. In equity markets, European stocks rebounded from their lows to close down around 0.8%, while in the US the S&P 500 reversed early losses to end in the black with gains of around a half a percent.

Regarding the latest inflation data in the UK released earlier this morning, the annual rate of headline inflation re-accelerated to 2.3% in October from 1.7% in September, slightly ahead of the expected 2.2%, mainly reflecting rising energy prices last month (compared to falling prices in October 2023). Core inflation, which excludes  energy and food prices, nudged back up to 3.3% from 3.1%, reflecting a slight increase in both goods and services inflation (to 0.5% and 5% respectively).

The UK inflation data won’t have come as a surprise to the Bank of England (BoE), which expects headline inflation to end this year at about 2.5% according to its latest forecast. They do mean though that the BoE is likely to lower interest rates gradually – as indeed its Governor, Andrew Bailey, indicated in remarks yesterday – with the market not pricing in another full 25bps cut until March of next year.

ECB member Panetta – who is a noted ‘dove’ – says ‘restrictive monetary conditions are no longer necessary,’ and that “we need to normalize our monetary policy stance and move to neutral – or even expansionary territory – if necessary.” The neutral interest rate for the Euro area is generally considered to be around 2%, with ‘expansionary territory’ below 2%.

Looking to the day ahead, economic data due include the ECB’s index of negotiated wages – which will be closely watched – and construction output for the Euro area, while a number of ECB and Fed members are scheduled to speak also.