Main currency pairs not much changed
US government bonds led a decline in yields yesterday and equity markets chalked up decent gains, but in FX the main currency pairs were not much changed. Donald Trump is keeping the tariffs pot boiling with 50% slapped on Brazil, much larger than the 10% announced on Liberation Day (though this is as much to do with politics as trade), but more positively there are reports that the US and EU are close to concluding a framework trade agreement. The euro is trading at around $1.1730 against the dollar this morning – and seems to be stuck in consolidation mode for now following its strong gains recently – while sterling is hovering just above $1.36, leaving EURGBP at around £0.8620.
The fall in US bond yields reversed a five-day rising streak, with strong investor demand at an auction of 10-year bonds (noteworthy given concerns about the US fiscal position) contributing to the move lower. Yields on the latter were down around 7bps on the day, while equivalent German and UK yields fell by a more modest 2-3bps (though they are nudging lower again at the start of play today). In equity markets, European stocks had another strong session, gaining almost 1.5%, while the main US indices added between 0.5% and 0.9%.
The minutes of the Fed’s June monetary policy meeting contained no new news. They noted that “increased tariffs were likely to put upward pressure” on inflation but there was “considerable uncertainty…about the timing, size, and duration of these effects”, while “most participants assessed that some reduction (in interest rates) this year would likely be appropriate.” The market is currently pricing in about 50bps of cuts by end-2025.
ECB member Nagel says monetary policy is “in a good position to respond to further developments”, adding that it would be “unwise to commit to a certain interest-rate path, to envisage a further cut or, indeed, to rule it out.” The market expects the ECB to keep rates steady at its meeting later this month and sees about a 50/50 chance of a 25bps reduction at its following meeting on September.
It’s another quiet day ahead in terms of economic data with just the regular weekly jobless claims due in the US. There are also a few ECB members scheduled to speak during the course of the day.