Sterling gains some ground

The Bank of England’s “cautious” rate cut helped sterling chalk up modest gains against the dollar and euro last week, with the pound trading just north of $1.34 and just under £0.8750 respectively  at the start of play today. The single currency lost some ground to the dollar on the week, notwithstanding the ECB keeping rates on hold again at its latest meeting, though at around $1.1725 it is still more than a cent ahead in December to date. The yen was very much on the back foot, despite the Bank of Japan hiking rates, shedding more than 1% against the dollar. There are a number of US  economic data releases due over the next few days, including the government shutdown-delayed GDP report for Q3 tomorrow.

Softer than forecast employment and inflation data contributed to a fall in US government bond yields last week, with 2- and 10-year yields both about 4bps lower. German 2-year yields were flat but 10-year yields rose by around 4bps, while UK yields were largely unchanged across the curve. In equity markets, US stocks had another positive session on Friday, with the S&P 500 gaining almost 1% to end flat on the week overall, while the Stoxx Europe 600 added almost 0.5% on Friday to end 1.5% higher on the week.

Fed member Williams says he doesn’t “have a sense of urgency to act further on monetary policy right now, because the (interest rate) cuts we’ve made have positioned us really well”, adding that he’d like to see inflation come down some more before lowering rates again. The market isn’t fully pricing in the next cut in rates until the second quarter of next year.

Tomorrow’s GDP report in the US is expected to show the economy grew by 0.8% q-o-q in Q3, according to the consensus forecast, only slightly less than the 0.9% growth in the second quarter of the year. This would leave the annual (y-o-y) rate of growth in Q3 at 2%, a moderation from the 2.7% pace of growth recorded over the year to Q3 2024. Other US data due over the next few days include consumer confidence (December) and industrial production (November) tomorrow and weekly jobless claims on Wednesday.