Sterling declined during today’s trading alongside a weaker euro, as a broad selloff across global bond markets pushed long term yields in both the United States and the United Kingdom to levels not seen in decades, keeping the dollar close to its strongest levels of the year. GBP/USD fell to $1.3215, while EUR/USD slipped to $1.1288. In the bond market, the yield on the US 10 year Treasury rose to 5.340%, approaching its highest level in 52 weeks, while the dollar index tested 101.80 near its annual peak.
Chris Turner, global head of markets at ING, said concerns surrounding dollar depreciation have temporarily moved away from the center of market attention as cyclical factors and the strength of the US economy play a larger role in currency movements. He added that continued difficulties in negotiations between the United States and Iran could keep demand for the dollar firm through October, noting that the dollar index has risen in seven of the past ten Octobers.
Although US inflation data based on the Personal Consumption Expenditures index for August came in below expectations, its impact on interest rate expectations remained limited. Pricing for one month US interest rate contracts one year forward briefly fell by around five basis points before reversing the entire move by the end of the US session. At the same time, ADP data pointed to accelerating job growth, keeping the outlook for US monetary policy under close scrutiny.
Markets are now awaiting jobless claims and the ISM manufacturing index, with the headline reading expected at 55. Interest in these releases has increased amid the view that the artificial intelligence investment boom is gradually spreading into broader areas of the US economy. Investors are also watching comments from Federal Reserve officials Neel Kashkari and Chris Waller, with particular attention on any signals regarding the future path of monetary policy. Friday’s nonfarm payrolls report remains one of the most important upcoming catalysts for financial markets.
Sterling faced additional pressure from both dollar strength and the selloff in British government bonds. The yield on 30 year UK gilts climbed to 6%, its highest level in nearly three decades, while London’s FTSE 100 fell by around 2%, increasing pressure on the British government ahead of its first budget announcement later this month. Sterling’s decline was slightly larger than the euro’s, although ING did not directly link the difference to movements in the UK bond market.
Regarding the relationship between the United Kingdom and the European Union, ING noted that EUR/GBP declined this week after calls for a debate on closer ties with the European Union and the possibility of eventually rejoining. The bank nevertheless believes that any clear direction on this issue remains years away, while markets are also watching a possible UK EU summit around November 20.
As for the euro, Turner argued that its current decline reflects a more hawkish reassessment of US monetary policy expectations rather than independent weakness in the single currency. However, the widening spread between French and German bond yields to 127 basis points remains a concern, as it could add a higher risk premium to European assets and limit the European Central Bank’s ability to continue tightening monetary policy. Markets are awaiting comments from several ECB officials, including Joachim Nagel, Christine Lagarde, and Isabel Schnabel, although the likelihood of the ECB taking a more hawkish stance than the Federal Reserve appears limited at present.
ING expects the 1.1300 to 1.1320 area to act as an important support zone for EUR/USD. However, a further widening in European yield spreads combined with continued strength in US economic data could push the pair toward the 1.11 to 1.12 area. The bank also expects the dollar index to trade around 101.50 to 101.80 during the session, with the possibility of an upside breakout if US employment data comes in strong or if continued weakness in European debt markets adds pressure on the euro.
On the equity side, European stock markets opened October and the final quarter of the year lower as concerns over energy driven inflation and stalled diplomatic efforts in the Middle East outweighed the positive impact of softer than expected US economic data. The pan European STOXX 600, Germany’s DAX, and France’s CAC 40 each fell by around 0.6%, while the UK’s FTSE 100 declined by 1.1%.
Geopolitical developments in the Middle East remain one of the main factors limiting risk appetite across Europe. Stalled peace talks between the United States and Iran, aimed at ending a conflict that has continued for seven months, have kept uncertainty elevated in energy markets and global oil prices at high levels. This continues to place direct pressure on Eurozone economies that remain exposed to elevated fuel and energy costs.
Preliminary September data showed consumer prices accelerating faster than expected across several of the Eurozone’s largest economies, including France, Italy, and Spain, driven by higher petrol, diesel, and wholesale gas prices. Persistent cost pressures have increased concerns that the European Central Bank may be forced to keep monetary policy restrictive for longer in order to prevent inflation from becoming entrenched at elevated levels.
Meanwhile, markets continued to assess a series of US economic releases that came in weaker than expected during the previous session. Although August Personal Consumption Expenditures inflation came in below market forecasts and temporarily eased pressure on global bond yields, ongoing geopolitical tensions and rising inflation across several European economies prevented a broader rally in equity markets.
Institutional investors continue to adopt a cautious stance, maintaining relatively high cash levels ahead of additional economic releases and corporate earnings over the coming weeks. The final quarter of the year begins against a complex backdrop of elevated bond yields, energy related inflation pressures, and diverging monetary policy expectations between the United States and Europe.
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