Sterling softer

Given the scale of the moves seen in FX markets on Tuesday, it’s perhaps not too surprising that the euro and sterling have given up some of the sizeable gains made against the dollar. The euro has slipped to around $1.0840, while October’s softer than expected inflation readings in the UK are also weighing on the pound, which has dipped to under $1.24 against the dollar and to around 87.5p against the single currency.

US bond yields also reversed course yesterday with 10-year yields closing about 10bps higher (having fallen by around 20bps in Tuesday’s session), though they have edged a little lower again in overnight trading in Asia with German and UK yields following suit this morning. In equity markets, US and European stocks managed to advance further albeit the gains were modest enough.

Fed member Daly says the fall in US inflation in October was “very, very encouraging”, though she indicated that more evidence is needed that it is on a sustained path back to 2% while adding that interest rate cuts “are not happening for a while”.

The manufacturing sector in the Euro area contracted again in Q3 with output falling by more than 3% from Q2. It also ended the quarter on a weak note (output fell by 0.7% in September), pointing to the risk of a further contraction in the final quarter of the year.

The European Commission has lowered its forecast for full-year GDP growth in the Euro area in 2023. According to its updated projections, the economy is now seen expanding by 0.6% this year (revised from 0.8%), with growth expected to pick up to 1.2% in 2024 (and to 1.6% in 2025). Headline inflation is forecast to run above 3% for most of next year before falling to 2.6% in the final quarter and declining further to 2.1% in Q4 2025.

Economic data due today includes jobless claims, industrial production and import prices in the US, while a number of Fed and ECB members (including Lagarde) are scheduled to speak.