Market Commentary 

The euro rose to close to $1.15 to the dollar yesterday and broke through that level overnight after yet more tariff threats from Donald Trump, and is up about a cent from where it was yesterday morning. The greenback lost ground to all major currencies following weaker than expected US inflation data for May which also had markets increase the chance of Fed rate cuts. Overnight, President Trump told reporters the US would send out ‘take it or leave it’ letters in the next few weeks to trading partners setting out unilateral tariffs. The dollar initially had some support earlier yesterday from news of a US-China trade deal but the details of this deal (with a 55% tariff on China remaining) proved to be less encouraging and Trump’s comments further undermined the dollar. The euro is trading at $1.1520 this morning and 84.9p to sterling. Sterling is a little on the backfoot against the euro following a weak monthly UK GDP print this morning but has gained on the dollar and is trading at $1.3560.

Yesterday’s Events

The market is increasing the chances of the Fed bringing forward rates cuts into this year, the market is now pricing in a 75% chance of a 25bps cut by the September FOMC meeting and two 25bps cuts are nearly fully priced by year-end. Inflation data was slightly weaker than expected and the US labour market is also showing some signs of softening so the market is speculating that these two events in tandem will spur the Fed to act faster. US bond yields fell with 10-year yields down 6bps to 4.4%. European bond yields saw small rises with German 10-year bund yields up 1bps to 2.53%. The US-China trade deal saw US equities gain initially but those gains and more were lost over the course of the session with the S&P 500 down 0.3% for the day.

Core US CPI inflation rose just 0.1% in May – against an expectation of a 0.3% gain – leaving the annual core rate unchanged at 2.8%. US core inflation has come in a bit lower than expectations for a number of months, suggesting perhaps that retailers have yet to pass on tariff impacts – perhaps from running down inventory imported pre-tariffs. The huge uncertainty about what final US trade policy will be may also be causing businesses to delay passing on price increases until there is more certainty. However, running down stocks and holding off on decisions can only work for so long, as ultimately tariffs will prove inflationary.

The US and China agreed a trade deal after extensive talks in London. The deal now goes to their respective leaders to sign off. The details from the deal are unclear but China is to resume shipments of rare earth minerals to US companies while the US will ease export controls on some technology. It’s also unclear if there will be further efforts to reduce tariffs which President Trump suggested will be 55% for Chinese imports (and 10% from China on US imports) as there is little in the agreement, as announced, that will improve trade between the two countries for the vast majority of goods. Overnight, President Trump ratcheted up trade tensions yet again saying the US will set unilateral tariffs for countries (again) by sending them letters outlining tariffs in the next one to two weeks ahead of the July 9th deadline to reimposes his initial ‘liberation day’ tariffs set in April.

UK GDP fell by 0.3% in April, leaving the three month over three month rate unchanged at 0.7%. This is the first contraction in a single month for six months. The weakness was across the board with services sector and manufacturing sector output contracting, although construction made gains last month. Exports to the US dipped after gains in previous months as exporters rushed to get ahead of tariffs. There were a number of tax and energy bill increases that came into effect in April which appear to have caused consumers and business to hold back on spending. The UK is also dealing with a softening labour market which is likely impacting sentiment. Separately, data showed the UK housing market is slowing with the RICS house price balance falling to -8 in May from -3 in April indicating a greater number of estate agents were reporting a fall in prices rather than a rise last month.

The Day Ahead

Looking to the day ahead, we get US PPI and initial jobless claims while there is a number of ECB speakers due.

Market Commentary

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.

Yesterday’s Events

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.

The Day Ahead

Looking to the day ahead, we get US inflation data and ECB chief economist Lane is due out.

Market Commentary

A quiet opening day to the week, a rare enough event given uncertainty over the past few months, but with little market/political news or economic data to shift currencies, the euro held its own to the dollar, remaining around $1.1420 for much of the day, only briefly dipping towards $1.14 or getting above $1.1430. The dollar did make small gains overnight but the euro is still trading above $1.14 this morning. Similarly, to sterling there was little movement with the trade to the single currency consistent around 84.2p for much of the day, but slightly worse than expected UK labour market data this morning has seen the euro move up to 84.4p this morning. GBPUSD saw sterling briefly move up over $1.3550 at times yesterday but again, the UK currency has lost some ground this morning and is trading at just over $1.35.

Yesterday’s Events

After a sizable move up in US bonds yields on Friday, they retrenched a little with 10-year yields down 3bps to 4.48% and similar falls in shorter dated bond yields.  European bond yields were largely unchanged with 10-yields bunds remaining at close to 2.56%. Equities also traded sideways with the S&P more or less flat for the day and holding on above 6,000 while in the Europe, the FTSE was also flat the Eurostoxx fell 0.2%.

UK labour market data shows continued signs of cooling. Employment growth in the three months to April fell to 89k, from 112k in the three months to March while a separate measure, payroll employees, saw a bigger than expected 109k fall in May – the biggest fall in a single month since Covid era declines. The unemployment rate also ticked up, to 4.6%, from 4.5%, now up a full 1/2 percent since the summer of last year. The data also shows wages growth is slowing, while still remaining relatively elevated, with weekly earnings (ex bonuses) rising at an annual rate of 5.2% from 5.6% the previous month. This is all broadly in line with BoE projections so is not going to move the dial much for them ahead of the MPC meeting this month where they are expected to stay on hold, before resuming rates cuts later this year.

Irish construction PMI fell to 49.2 in May from 52.4 in April. This is a more subdued reading than expected and followed two months of above 50 readings. There was a marginal decline in home building, the first contraction in 9 months, as well as a reduction in civil building activity while commercial activity picked up. The underlying picture was brighter than the headline with new orders expanding for the fourth month in a row, albeit at a softer pace than in April and March with firms citing uncertainty around US trade policy as a hindrance, but employment gained and firms in the sector continued to have an optimistic view that activity would rise in the coming 12 months.

ECB governing council member Peter Kazimer said that he thinks the Bank has now reached neutral territory with June’s rate cut and questioned if any more cuts were needed. He said that while he sees ‘clear downside risks to growth’ it would be a ‘mistake to neglect upside inflation risks’ and the Council needed assess data over the summer to see if more ‘fine tuning’ is needed.

The Day Ahead

Looking to the day ahead, we get US NFIB small business optimism while Villeroy, Holzmann and Rehn from the ECB are due out.

Market Commentary

Solid US non-farm payrolls for May saw the dollar gain slightly on the euro on Friday, the single currency dipping just below $1.14 at the end of last week, however the dollar is losing out as markets open this week and the euro has taken back some of its losses and is back up to $1.1425. The euro also lost a marginal amount of ground to sterling, and is trading at 84.2p currently.  Sterling did lose out to the dollar however, getting down to the lower end of $1.35 but, again, the dollar is slipping this morning with the trade back up above $1.3550. There is a limited amount of US data out this week, and we are also now in the Fed’s communications blackout period ahead of the FOMC meeting, but we could still be in for another volatile week for the dollar given uncertainty driven by the political situation there.

Yesterday’s Events

US bonds saw a rise in yields, with the market interpreting the better employment data as backing up the Fed’s view the labour market is solid, and that they may hold off on restarting rate cuts for longer than was priced in. 10-year yields rose 12bps to 4.5%, shorter dated bonds also saw yields rise with 2-year and 5-year yields all currently over 4% now. The positive sentiment also supported equities with the S&P up 1% for the day and breaching 6,000 again for the first time since late February. Other US indices made gains on Friday also as did European indices.

US non-farm payrolls rose by 139k in May, slightly ahead of expectations. The unemployment rate was unchanged at 4.2%. While markets reacted positively to this data, the details showed that the labour market situation in the US may be softening. The pace of jobs growth slowed last month compared to the rate 3 months ago, and there were a net 95k jobs removed in revisions to the previous two months data. The unemployment rate was steady but chiefly because the participation rate fell, indicating people left the labour force rather than because of employment growth. The labour market situation is still healthy but these signs of weakness will be closely watched by the Fed if not markets immediately.

ECB member Schnabel said the Euro Area should capitalize on the policy uncertainty in the US and give the Euro a greater role as a global currency. She said there is now a ‘window of opportunity’ to strength the euro’s global role amid signs she sees that investors worldwide are focusing on Europe to diversity and saying this could have a ‘positive confidence effect’ . Her comments echo calls from other ECB members, including President Lagarde, who says now is a ‘prime opportunity’ for a ‘global euro moment’ and called on politicians on the continent to push forward capital investment and maintain macroeconomic and political stability.

The Day Ahead

Looking to the week ahead, the economic data calendar is reasonably light. In Europe , while there is a great number of ECB speakers, the only data of real note is industrial production and investor confidence. In the UK, we get labour market and GDP data for April as well as the RICS house price balance while in the US, we have NFIB small business optimism, inflation data and University of Michigan sentiment.

Market Commentary

The ECB cut rates by another 25bps yesterday taking the deposit rate to 2%. This move was fully priced in by the market so there was no great surprise. There will likely be a pause in rate cuts now, for the July meeting at least, but the market is still pricing in one further cut in the second half of the year before the ECB stands pat. The euro gained on the dollar and sterling following the decision, getting up close to $1.15 for a short time before back to under $1.1450 now and 84.3p to sterling. The GBPUSD cross did see sterling gain for a time yesterday also, breaching $1.36 briefly but back down to around $1.3550 now.

Yesterday’s Events

The ECB rate cut was its eighth in total since starting to cut rates in June of last year, taking a cumulative 200bps from the deposit rate down to 2%. President Lagarde said the ECB is ‘in a good position to navigate the uncertain conditions’ and said the Bank is ‘getting to the end of a monetary policy cycle’. The updated baseline forecasts for the Euro Area show shallow growth of 0.9% this year and 1.1% next year, unchanged and down 0.1 percentage points respectively from March’s forecasts. Headline inflation is seen as being a little weaker than previously thought, averaging 2.0% this year and a below target 1.6% next year (both down 0.3 percentage points from March’s projections). Lagarde said the risks to the economy were still skewed to the downside – indeed the forecasts included a downside scenario with growth of 0.5% this year and 0.7% next year. However, inflation appears to have been tamed and, while a stronger euro and lower energy costs may weigh on it next year, it’s forecast to return to target in 2027. All this means that the ECB may see their job i.e. the 2% price mandate, as being largely complete. The markets are still pricing in one further 25bps cut in rates, which many in the ECB may argue is needed due to uncertainty, downside risks and sluggish growth, but they have bought themselves some time to assess incoming data before moving again so there is only a 40% chance of a 25bps cut coming at the next meeting at the end of July moving to an 85% chance at the September meeting.

US equities saw the major indices post losses for the day. An escalating public war of words between President Trump and former acolyte Elon Musk injected more uncertainty into sentiment which saw the S&P lose 0.5% for the day and the Nasdaq lost 0.8%, with Tesla down a sharp 14%. With President Lagarde indicating the ECB is closing in on the end of its easing cycle, shorter dated European bonds yields rose with German 2-year yields up 8bps to 1.86% and longer dated yields also up but not as much, with 10-year yields up 5bps to 2.58%.

Irish GDP grew by huge 9.7% quarter-on-quarter in Q1. This was driven by a jump in exports, up 9.4% quarter-on-quarter (23% year-on-year), led by pharmaceutical exports to the US as companies sought to get ahead of potential tariffs. There was also a substantial jump in investment, largely due to the intellectual property. The surge in Q1 will likely be balanced out by weaker activity in coming quarters but, for now, GDP is up 22.2% year-on-year. Looking past the distortions in Q1, the modified measures (which remove most multinational company impacts) show the domestic economy is in good shape, with household spending up 0.6% from Q4,  modified investment up 1.5% – supported by gains in construction – and modified domestic demand rising 0.8%.

The Day Ahead

Looking to the day ahead, we have retail sales in the Euro Area and non-farm payrolls and unemployment data in the US. On the speaker front, we have a number of ECB members, including President Lagarde again, and Governor Bowman from the Fed.