Rocky road for Euro
The euro had a rocky time last week with political concerns to the fore in the fallout from the European parliament elections. That continued to be the case on Friday with the single currency dipping down to below $1.07 to the dollar at times, more than two cents down from closer to $1.09 a week previously. Against sterling, it touched off close to the bottom of 84p, the lowest it’s been since mid-2022. The euro did manage a very small rebound into the close on Friday and is now trading at $1.07 and 84.4p respectively. Political risk will abound for the next couple of weeks at least with the outcome of the snap French elections far from clear and the first round set for June 30th so it could be a turbulent time for the euro. In contrast, there is less risk for sterling – although it has lost a bit of ground to the dollar, to under $1.27 – as polls at the moment suggest a clear winner in the UK election just a few days later.
Those snap elections in France have made it the focal point. 10-year French government bond yields rose last week and, at times, were up above 3.2%. They fell back a bit on Friday and are now trading at around 3.15% but similar to the euro, there are risks in the weeks ahead. In contrast, with the interest rate cycle turning, there is downward pressure in some other Euro Area bonds, and German 10-year yields dipped about 25bps last week to 2.35%. In the US, 10-year treasury yields were also under some downward pressure and came close to 4.2% on Friday, nearly 20bps lower on the week. In equity markets, there was contrasting fortunes on either side of the Atlantic with the S&P 500 up 1.6% for the week, near an all time high while the Eurostoxx was down over 4% (and the French CAC down over 6%) and the FTSE lost 1.2%.
US consumer sentiment fell to a seven month low in June. The University of Michigan sentiment index dipped to 65.6 in June from 69.1 in May when an increase was expected. Households are still worried about their finances and economic conditions, with consumer’s sentiment towards both of these sliding in June. That contrasts to recent labour market data which shows the US is adding plenty of jobs, non-farm payrolls were up 272k in May, but consumers are still concerned about the economy and the unemployment rate did tick up slightly to 4.0% last month. Inflation expectations held steady in June with 1-year expectations unchanged in June at 3.3% and the five to ten year view ticking up to an annual rate of 3.1% (from 3.0%). That, again, contrasts to sliding rates of inflation and an outlook that has it coming back to around 2% in the US in the next year or so. Consumers have been badly squeezed by past inflation and sentiment now shows they are wary of the potential for future price hikes.
ECB President Christine Lagarde said on Friday the ECB is on the right path to return inflation to 2%, although the process towards it may be uneven at times. She said that while there are ‘plenty of challenges’ she believes that the Euro Area is now ‘heading toward a disinflationary path that will have its little hiccups here and there, what we call bumps in the road, buts it’s definitely on a declining path”. The ECB forecast HICP inflation to be 2% by Q4 of 2025 and Lagarde confirmed this was the view ‘unless we have a major shock, or unless we have downside risks that materialize in the next few months, this is the direction of travel’. She would not be drawn on a path for monetary policy easing following last week’s initial 25bps cut nor the financial market turmoil surrounding her home country of France. She did comment more broadly on future factors impacting inflation – namely geopolitical risk and climate change – and warned these new types of shock may put upward pressure on prices, at least initially.
Separately on Friday, ECB Governing Council member Centeno warned more rate cuts would be data dependent and ‘prudence’ would be needed before more action was taken and implying that rates would come down at a more more subdued pace then they had increased by. Coming from one of the ECB’s more noted dovish voices, it adds to the evidence that the Governing Council will be cautious and patience before moving again.
Economic data due today includes Euro Area labour costs and Empire manufacturing in the US. There are several notable central bank speakers including the ECB chief economist Lane and Vice President Guindos and Williams and Harker from the Fed. Further ahead there is plenty of data this week including inflation in the Euro Area and UK as well as flash PMI readings for the major economies. Finally, there will be a Bank of England monetary policy meeting on Thursday, although no change in policy is expected.