Sterling extends its gains

Sterling has extended its gains against the dollar and euro, strengthening to fresh highs of $1.3350 and £0.8325 respectively. The pound has now risen by around 3% and 1.5% respectively since just before the ECB kicked off the recent round of central bank meetings a couple of weeks ago, reflecting the Bank of England’s more cautious stance on lowering interest rates. That said, yesterday was also a case of euro weakness with softer than forecast PMI data weighing on the single currency, which has slipped to $1.1120 against the dollar.

The weaker than expected Euro area PMI data has led the market to price a 50% chance of an ECB rate cut at next month’s meeting. This contributed to a decline in German government bond yields yesterday, with 2- and 10-year yields both falling by around 5bps, while US and UK yields were flat to marginally lower on the day. Meanwhile, equity markets chalked up modest gains, of  around 0.25% for both European and US stocks.

Economic activity in the Euro area contracted in September judging by the Composite PMI, which fell below the “no change” 50 level this month (to 48.9 from 51.0 in August) with services activity slowing further and manufacturing continuing to contract. In contrast, the equivalent PMIs for the UK and US – at 52.9 and 54.4 respectively – point to solid expansion in both economies.

Fed member Bostic has said the central bank has made “substantial progress” on inflation but risks to employment have increased, while his colleague Kashkari notes that, “as we go forward, we will probably take smaller steps (on interest rates) unless the data changes materially,” adding that quarter-point reductions at both the November and December meetings are a “reasonable starting point.”

For the day ahead, it is relatively quiet on the economic data front with the German Ifo Index and US consumer confidence and house prices the main releases of note.