EUR / USD
US personal income increased 1.9% for July compared with expectations of 1.5% with the increase in income held to 0.4%. The core PCE prices index increased 0.3% on the month with the year-on-year rate at 1.3% from 1.0% previously. Despite the monthly increase, the rate remains well below the 2.0% target, reinforcing expectations of a very loose US monetary policy, especially after the Fed announcement that it would switch to an average inflation target.
The dollar overall was unable to make headway and the Euro settled close to 1.1900. CFTC data recorded a fresh increase in long Euro positions to a record high of close to 212,000 from 196,000 the previous week, maintaining the potential for a sharp correction if sentiment shifts.
German consumer prices declined 0.1% for August with year-on-year inflation at 0.0% compared with consensus forecasts of 0.1% and reinforcing a lack of inflationary pressure. ECB council member Schnabel, however, stated that there was no need to adjust policy if the economy meets forecasts.
Federal Reserve vice-chair Clarida stated that the macro models had been wrong and that it was difficult to justify higher interest rates in the absence of inflation. He reiterated a lack of support for negative interest rates and expressed reservations over yield curve control. He also stated that there are powerful global deflationary forces. The dollar overall remained under sustained pressure with month-end position adjustment a significant factor and complementing negative underlying sentiment.
The dollar dipped to fresh 27-month lows during New York trading to post a fourth successive monthly decline with the Euro posting highs around 1.1965 before a slight correction. The US currency secured no relief in Asia on Tuesday as underlying sentiment remained notably weak with a Euro test of the important 1.2000 area.
The yen maintained a firmer tone on Friday with further speculation that there would be a shift in monetary policy following the resignation of Prime Minister Abe. The very loose Bank of Japan policy was a key pillar of Abe’s economic platform and markets expected a slightly more cautious approach under a new leader.
Japanese preliminary industrial production increased 8.0% for July and above market expectations of 5.0%, but retail sales declined.
The August Chinese PMI manufacturing index was little changed at 51.0 from 51.1 previously while the non-manufacturing index strengthened to 55.2 from 54.2 previously which boosted confidence in the Chinese services-sector economy. The Caixin manufacturing PMI strengthened to 53.1 from 52.8 in July.
Although the dollar overall remained under pressure, the Japanese yen performed even worse amid position adjustment. The dollar advanced to near 106.00 before fading with the Japanese currency retreating sharply.
The largest faction in Japan’s LDP party backed chief cabinet secretary Suga to replace Abe, increasing expectations of policy continuity with the dollar trading around 105.75 as dollar weakness dominated with the yen slightly weaker on the main crosses.
Sterling maintained a strong tone on Friday with a break above 1.3300 against the dollar while the Euro dipped to 2-month lows near 0.8910 despite UK caution.
CFTC data recorded a small net decline in long Sterling positions, although there was a dip in both long and short positions for the week as caution prevailed.
There were reports that the UK government was considering increased taxes on companies and capital gains to help narrow the budget deficit over the medium term, although the market impact was limited. French officials commented that Brexit talks were not advancing because the UK is being unrealistic while the UK government reiterated that it was prepared to walk away from talks if there was no move to a compromise.
Sterling maintained a strong tone despite fundamental reservations and posted 8-month highs close to 1.3400 against the dollar before a slight correction while the Euro secured only a marginal recovery to 0.8925. Dollar weakness dominated on Tuesday with the UK currency at fresh 8-month highs just above 1.3400.
The Swiss KOF index strengthened sharply to 110.2 for August from 86.0 and well above consensus forecasts of 90.3. The data boosted expectations of a stronger Swiss performance which helped underpin the franc. Swiss sight deposits increased to CHF701.6bn in the latest week from CHF700.0bn the previous week, maintaining expectations that there was sustained, low-key intervention by the National Bank to curb franc gains.
The Euro strengthened to highs near 1.0800 before fading slightly while the dollar tested the 0.9000 level before a limited recovery. The Euro edged higher on Tuesday with the dollar close to 5-month lows only fractionally above the 0.9000 level as negative US sentiment persisted.