The pound sterling weakened against the US dollar in early European trading, shedding 0.2% to reach $1.2450. This decline comes amid growing concerns surrounding economic data that have triggered a surge in bond yields, reflecting the interest rates on debt instruments.
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Government borrowing costs in the UK, US, and Europe have experienced an upward trend as recent data points to persistent inflation. This raises concerns about the potential limitations central banks may face in implementing interest rate cuts this year. In the US, the Institute for Supply Management (ISM) released its monthly survey on Tuesday, revealing a climb in service sector prices to their highest point since January of last year. Simultaneously, US job vacancies exceeded expectations, reaching a six-month peak.
Market Anticipation Turns to Federal Reserve Minutes and Non-Farm Payroll Data
Currently, market participants eagerly await the release of the US Federal Reserve’s minutes from its final meeting of 2024. These minutes are expected to provide crucial insights into the central bank’s intended interest rate trajectory for the current year. Furthermore, Friday’s release of the closely monitored US non-farm payrolls data will be another focal point for investors.
Susannah Streeter, head of money and markets at Hargreaves Lansdown, anticipates robust figures, indicating sustained strength in the US economy. However, this economic vigor might be a double-edged sword, potentially fueling concerns that the Fed will adopt a more cautious approach to interest rate reductions.
Interest Rate Cuts and Rising Bond Yields
The Fed has already signaled the likelihood of only two rate cuts this year, a downward revision from the four projected in September. Streeter suggests that speculation is mounting that this number could be further reduced to just one if inflationary pressures remain persistent. Amidst growing expectations of a “higher for longer” rate environment, the yield on the 10-year US Treasury bond has climbed to 4.67%, marking its highest level in eight years. In the UK, the yield on 30-year government bonds, known as gilts, is nearing its highest point since 1998, currently trading at 5.24%.
Stagflation Concerns Loom Over the UK
Streeter highlights concerns regarding the potential emergence of stagflation in the UK, characterized by rising inflation, robust pay growth, and a stagnating economy. These factors could constrain the extent of interest rate reductions this year. The pound remained relatively stable against the euro, trading at €1.2058 on Wednesday morning.
Gold Prices Respond to Inflationary Concerns
Gold prices experienced a slight uptick on Wednesday morning, influenced by persistent inflation worries and uncertainty surrounding the Fed’s rate policy. Spot gold prices rose 0.2% to $2,653.21 per ounce, while gold futures saw a marginal increase of 0.1% to $2,668 per ounce.
Although rising bond yields typically exert downward pressure on gold prices, being a non-yielding asset, gold often attracts investors during periods of economic uncertainty. Furthermore, the People’s Bank of China’s continued accumulation of gold reserves in December underscores the enduring demand for the precious metal from central banks.
Oil Prices Climb on Supply Concerns
Oil prices also witnessed gains on Wednesday morning, driven by concerns about tightening supply, which could contribute to inflationary pressures. Brent crude futures advanced by 0.8% to $77.66 per barrel, while US West Texas Intermediate (WTI) crude climbed 1% to $75.04.
Streeter points to industry data revealing a significant drop in US oil stocks, exceeding expectations. Additionally, expectations of tighter supply due to sanctions on Russia and China, coupled with Saudi Arabia’s recent price increase for Asian customers, are contributing to the upward momentum in oil prices. Increased energy demand from China, anticipated in response to planned economic stimulus measures, is another factor supporting higher oil prices. These price increases are expected to translate to higher fuel costs, posing further challenges for central bank policymakers grappling with inflation. In broader market activity, the FTSE 100 index remained largely unchanged on Wednesday morning, trading at 8,246.16 points.
