Main currency pairs not much changed

The euro and sterling have been essentially moving sideways against the dollar since bouncing off their lows earlier in the week. The single currency is trading at around $1.0290 this morning, little changed from yesterday morning, while the pound has slipped to around $1.2190 (from over $1.22) on the back of weaker than expected UK retail sales for December released a short while ago. This leaves EURGBP a touch firmer at about £0.8440, within the £0.84 to £0.8450 range that has prevailed over the past few trading sessions.

Bonds rallied again yesterday helped by dovish Fed commentary. US 2- and 10-year yields both fell by around 5bps, the latter now down around 15bps since last week’s close, while equivalent UK yields fell by around 8bps and 5bps respectively, bringing the decline in 10-year yields since Tuesday’s highs to 20bps. German yields saw more modest declines, of around 2-3bps. Meanwhile, in equity markets, European stocks had another very positive session, advancing by 1.5%, but US indices finished in the red.

Fed Governor Waller said “the inflation data we got (on Wednesday) was very good (and) if we continue getting numbers like that, it’s reasonable to think rate cuts could happen in the first half of the year,” adding that he wouldn’t entirely rule out a cut at the Fed’s next but one meeting in March. The market has brought forward the expected timing of a rate cut but not to as soon as March, though it is toying with the idea of a possible June move.

Yesterday’s retail sales in the US were a little softer than expected, but spending still rose by 0.4% in December following an upwardly revised increase of 0.8% in November. The Atlanta Fed’s latest estimate of the run rate for GDP growth in Q4 is now 3% (annualised rate), the same as the Q3 outturn, with consumer spending the main driver.

In the UK, retail sales fell by 0.3% in December according to this morning’s data, much weaker than the 0.4% increase expected, and followed a downward revised gain of just 0.1% in November. Sales volumes over the three months to December fell by 0.8% from the three months to September, which will have weighed on overall GDP growth in the final quarter of last year.

Looking to the day ahead, economic data scheduled include industrial production and housing starts in the US and a final reading of Euro area inflation in December (the flash reading showed headline inflation nudged up to 2.4% from 2.2% in November, while core inflation remained at 2.7%),  while the IMF publishes its interim World Economic Outlook.