EUR / USD
ECB council member Schnabel stated that in all likelihood inflation will noticeably decrease as soon as next year. She added that a premature policy tightening in response to a temporary increase in inflation would choke the recovery, but added that the bank would act resolutely and quickly should inflation reach 2% sustainably earlier than expected. The inflation data will be monitored closely in the short term.
The Euro remained on the defensive ahead of Monday’s New York open and tended to drift lower. Commodity currencies were able to resist selling pressure, but the dollar strengthened to 2-week highs with the Euro retreating to lows around 1.1770.
The dollar was unable to hold its best levels and the Euro recovered to trade just above 1.1800 at the European close with a lack of conviction over the direction.
In its latest survey, the New York Federal Reserve reported that one-year inflation expectations had increased to 5.2% from 4.9% with three-year expectations at 4.0% from 3.7%, maintaining underlying concerns over inflation pressures.
The latest US CPI inflation data will be watched closely on Tuesday given the potential importance for interest rate expectations. Consensus forecasts are for a headline increase in prices of 0.4% and an underlying increase of 0.3%. Strong data would increase pressure for a Fed tightening while a weaker release would provide relief.
The dollar was unable to regain momentum on Tuesday and the Euro traded around 1.1810 as narrow ranges prevailed.
Equity markets maintained a firm tone into the New York open, although the Japanese currency was resilient with the dollar unable to make significant headway with little net change in bond yields which sapped potential US support as it traded close to 110.00.
There were no comments from Federal Reserve officials with the blackout period in effect ahead of next week’s policy meeting, but there were expectations that the Fed would continue the move towards announcing a tapering of asset purchases this year.
The US Federal budget deficit amounted to $171bn for August, slightly below consensus forecasts of $175bn. Markets continued to focus on the risk of not approving a timely increase in the debt ceiling with the dollar held in narrow ranges.
The latest Japanese quarterly business confidence data recorded an overall recovery to 3.3 from -4.7 previously with manufacturing and services sectors both returning to positive territory. There were further reservations over the Chinese property sector and Evergrande in particular, although equity markets overall held steady. The dollar consolidated just above 110.00 against the yen in early Europe with the Euro close to 130.00.
Sterling drifted lower in early Europe on Monday, but there was buying interest close to 1.3800 against the dollar and a successful test of support helped trigger a more constructive tone. There were further expectations of underlying capital flows into UK assets which helped underpin sentiment. There were, however, fears that retail energy prices would continue to increase which would risk downward pressure on consumer spending. Latest inflation data is due on Wednesday with expectations of a jump in the headline rate. Overall money market trends continued to underpin the UK currency with futures seeing a 57% probability of a 15-basis-point hike in February.
Sterling recovered to around 1.3840 at the European close with the Euro retreating to lows at 0.8510 before a recovery to 0.8530.
The latest data recorded a 59,000 decline in the claimant count while the unemployment rate edged lower to 4.6% from 4.7%. Headline average earnings growth edged lower to 8.3% from 8.8%, marginally above expectations. Market reaction was limited with Sterling edging lower to 1.3835 against the dollar.
Swiss sight deposits declined marginally to CHF714.8bn in the latest week from CHF714.9bn previously which does not suggest that the National Bank had been intervening significantly to weaken the franc in the latest period.
The franc overall lost ground during European trading with expectations that negative interest rates would help drive funds out of the Swiss currency. The Euro strengthened to highs just below the 1.0900 level while the dollar posted highs around 0.9240 before correcting slightly.
The franc was little changed on Tuesday with negative rates continuing to sap support and the dollar traded around 0.9220.