Sterling gains ground
Sterling was on the front against both the dollar and the euro last week, supported by market expectations that the Bank of England will lower interest rates later and by less in 2024 than the Fed and the ECB. The pound extended its gains on Friday, strengthening by around half a cent against the dollar to $1.2850 (up 2 cents on the week) and rising by around half a penny to 85p to the euro. The latter, meanwhile, was broadly flat against the dollar on Friday albeit around a cent firmer on the week just shy of $1.0950.
Comments last week by Christine Lagarde and Jerome Powell copper-fastened expectations that the ECB and Fed will begin cutting interest rates around the middle of the year, which along with Friday’s (on balance) softer than expected US employment report in the US contributed to a decline in bond yields (10-year yields were 10-15bps lower on the week). Equity markets closed in the red on Friday, while over the week European stocks gained almost 1.5% but US indices were slightly lower.
The US economy added 275k jobs in February according to the employment report, ahead of expectations for a gain of about 200k, but the outturns for January and December were both revised down. Moreover, the unemployment rate nudged up last month and at 3.9% is now around half a percentage point off its early 2023 low, while wage growth also eased with hourly earnings rising by just 0.1% on the month and by 4.3% from a year earlier.
The key economic data release this week is the CPI report for February in the US tomorrow. The consensus expects the annual rate of headline CPI inflation to have remained at 3.1% last month, but the core rate is seen nudging down to 3.7% from 3.9% in January. An outturn along these lines would be consistent with a further decline in core PCE inflation (currently running at 2.8%) and would add to the Fed’s confidence that (PCE) inflation is returning sustainably to its 2% target.
Other data scheduled for the week ahead include the latest labour market and GDP reports in the UK tomorrow and Wednesday respectively, and retail sales (Tuesday) and consumer confidence and industrial production (both Friday) in the US. Meanwhile, there are a number ECB members lined up to speak over the course of the week.