Dollar support as US and China agree potential trade deal
The euro temporally lost a bit of ground yesterday, and for a time traded down below $1.14 to around $1.1375 but that was short lived and the single currency bounced back up through $1.14 and was closing in on $1.1450 before dipping back to that above $1.14 level again where it remains. The dollar is getting a little bit of support this morning on news that US-China trade talks had resulted in an agreement that is going to their respective leaders to sign off. Sterling did lose out to both the single currency and the dollar yesterday following weaker than expected UK labour market data released early yesterday morning had markets increasing the chances of two more UK rate cuts this year. The UK currency depreciated to 84.7p to the euro and has traded down to under $1.35 to the dollar.
The repricing of UK rate cuts by the markets saw UK bonds gain, with 2- 5- and 10-year yields all down around 9bps with the 2-year yield down to 3.91%. European bond yields also saw falls, but of a smaller magnitude with German 10-year bund yields down 4bps to 2.52% while US yields were little changed. In equities markets, US indices eked out further gains, presumably on hopes that the conclusion to US-China trade talks in London will result in a deal being implemented, with the S&P 500 up 0.6% for the day.
NFIB small business optimism rose in May, up to 98.8 from 95.8 in April. The increase was driven by better sentiment around the future economy and sales. Nonetheless, unsurprisingly, the uncertainty index rose with respondents highlighting tariffs and President Trumps ‘Big Beautiful Bill’ tax legislation as concerns although the NFIB described the bill as ‘historic pro-small business legislation’ . Taxes were listed as the single biggest concern for firms for the first time since 2020. While the index has improved. it’s only just above its long term average level and comes when trade tensions arguably improved last month with deals with China and the UK announced, though the situation remains volatile. A net 31% of small business said they were planning on raising prices in the next three months, the highest net reading in a year, reflecting the impact of tariffs while employment sentiment was at a low ebb with the number planning to hire at the lowest level since Covid-19 while relatively few are increasing wages, with the compensation index falling to its lowest reading since February 2021.
ECB governing council member Vujcic said that he thinks the Bank should pause policy now until September. He said that the Bank is ‘now in a very good position’ and ‘its worth waiting to get more data……to get another projection (staff forecasts due in September) before we decide where we want to go and hopefully by that time get more clarity on trade relationships’. French ECB Council member Villeroy said that with the latest cut in rates the ECB is in the ‘favourable ‘2 and 2′ zone’ where inflation is at target (2%) and the key rate (deposit) is also at 2%. But he added in such an uncertain environment, this does not mean the ECB is in ‘comfortable’ or ‘static’ position and the Bank remains ‘pragmatic, data-driven and agile’. The market continues to price in a 60% chance of a 25bps rate cut in September or 100% by the December meeting.
Looking to the day ahead, we get US inflation data and ECB chief economist Lane is due out.