EUR/USD gained upward momentum, approaching 1.0450 during the European trading hours on Thursday. This development comes as the market grapples with distinct dynamics affecting the US, eurozone, and UK economies. The broad weakness of the US Dollar has played a crucial role in supporting the pair's movement. Meanwhile, the hawkish stance of the European Central Bank (ECB) has influenced other sovereign spreads over German Bunds, albeit with limited widening as of yet.
The 10-year Italy-Bund spread remains notably tight at 108 basis points, down from 115 basis points at the beginning of the year and significantly lower than the levels exceeding 150 basis points observed in June last year. In the UK, the headline Consumer Price Index (CPI) for January rose to 3.0%, surpassing both the previous month's figure of 2.5% and the consensus expectation of 2.8%. This development highlights the inflationary pressures present in the UK economy.
German Bunds have underperformed versus swaps, with the 10-year yield closing more than 7 basis points above swaps. This marks the cheapest valuation to date on a closing level basis. Despite the support from a weaker US Dollar, the EUR/USD pair faces limitations from a broad risk-off mood driven by renewed tariff threats from US President Donald Trump, which could also impact the risk-sensitive Pound Sterling.
Financial markets have adjusted their expectations for the ECB deposit facility rate, now anticipating a year-end rate of around 2%. This shift reduces the likelihood of the ECB adopting a more accommodative stance. In contrast, there are indications that the Federal Reserve might implement more rate cuts than previously anticipated, similar to what is expected in the UK.
Market participants are keeping a close eye on US economic data and statements from Federal Reserve officials as these factors remain focal points influencing currency movements. The upcoming US data releases are expected to provide further insights into the economic landscape and potential policy adjustments.
The 10-year gilt yield in the UK experienced a modest increase of approximately 4 basis points, reaching 4.6%. Despite this rise, markets continue to closely price in a potential 25 basis point rate cut by May. A rate cut in March appears unlikely, with expectations leaning towards the Bank of England opting for gradual rate reductions on a quarterly basis.
In addition to currency and bond market developments, gold prices have reached another fresh all-time high, trading around $2,955. This surge in gold prices underlines ongoing uncertainties in global financial markets as investors seek safe-haven assets.