Volatile start to week in FX markets
The dollar dropped quite sharply yesterday after the Wall Street Journal reported that Donald Trump would not sign an executive order announcing tariffs in his first day as President, but would “instruct federal agencies to study tariff policies and the US’s trade relationship with China, Canada and Mexico”, though Trump subsequently said he would impose a 25% tariff on Mexico and Canada on February 1st. The euro and sterling rose to intra-day highs of $1.0435 and $1.2345 against the US currency respectively, but they have since come back to around $1.0370 and $1.2260 (both still up about a cent from last week’s close), while EURGBP is little changed through all of this as it continues to hover around the £0.8450 mark. The latest labour market report in the UK, released a short while ago, was something of a mixed bag and hasn’t had much impact on the pound.
US bond and equity markets were closed yesterday. Elsewhere, German and UK bond yields were little changed but thy are lower at the open this morning in line with a drop in US yields in overnight trading in Asia. European equities chalked up modest gains yesterday, adding to last week’s strong rally, while equity futures point to a positive open for US stocks later today.
In the UK, employment rose by a modest 36k, or +0.1%, in September-November (from June-August) according to the latest Labour Force Survey (LFS), but separate data (based on HM Revenue tax records) shows the number of payroll employees fell for a second month running in December. The LFS also reported an increase in the unemployment rate to 4.4% in the three months to September, while the annual rate of growth in whole-economy and private sector weekly earnings accelerated further to 5.6% and 6% respectively over the same period. The latter will be of concern to the Bank of England, though it did note after its December monetary policy meeting that its intelligence suggests “average pay settlements in 2025 will be within a range of 3 to 4%.”
ECB member Vujcic says “the risk of an overshooting or undershooting” the 2% inflation target appears “balanced,” adding that he’s “not uncomfortable” with current market pricing for interest rates (which sees the deposit rate being lowered by 100bps to 2% by the end of this year).
Looking to the day ahead, it is very quiet in terms of economic data with the Zew index of investor sentiment in Germany/Euro area the only release of note.