EUR / USD
The ECB council member Knot stated that curbing the dynamic in inflation is the only concern. He added that inflation uncertainty is too high in order to give forward guidance. Fellow member Villeroy stated that the bank’s hands are completely free on the next policy move while the capacity to deliver on the mandate cannot be subject to any doubt. Council member Muller noted that rapid inflation required a robust response. There were, however, source reports which indicated that a 50 basis-point rate hike was more likely than 75 basis points at the October policy meeting which limited Euro support to some extent.
ECB sources also suggested that the central bank are likely to debate the starting of quantitative tightening and bond sales at next month’s meeting.
The Euro strengthened to above 1.0100 after Friday’s open, but was unable to sustain the advance and gradually lost traction to trade below 1.0050 at the European close. There was further hawkish ECB rhetoric over the weekend with comments that policy would need to go into restrictive territory and the Euro secured a net gain on Monday, although it failed to break back above 1.0100. The latest US consumer prices data on Tuesday will be extremely important for underlying market sentiment.
US China’s new loans increased CNY1250bn for August after a CNY679bn increase the previous month, although this was below consensus forecasts of CNY1480bn. The total increase in social financing increased sharply to CNY2430bn from CNY756bn and above market expectations of CNY2075bn.
The dollar continued to lose ground ahead of Friday’s New York open with a slide to lows near 141.50 amid the Japanese intervention threat.
Kansas City Fed President George stated that she prefers steadiness and purposefulness of rate hikes over speed which suggested she would back a 50 basis-point rate hike. Fed Governor Waller stated that he supports another significant rate increase this month as inflation is far too high and it is too soon to say whether inflation is moving meaningfully and persistently downward with rate increases needed until at least early next year. The hawkish rhetoric suggested that he would back a 75 basis-point rate hike this month. Treasuries overall were slightly lower in choppy trading with no major data releases and the dollar secured a recovery to near 142.50.
There should be no further comments from Federal Reserve officials ahead of the scheduled policy meeting on September 21st. Markets will, however, be wary of unofficial press briefings ahead of the meeting which could lead to choppy trading.
CFTC data recorded an increase in short yen positions to over 58,000 in the latest week from 41,000 the previous week.
There was further verbal intervention from Japanese officials, but the impact was very limited given the lack of more decisive action and expectations that the Bank of Japan would not shift monetary policy. The yen lost ground again with the dollar strengthening to highs near 143.50 against the Japanese currency.
The Bank of England announced that, in light of the national mourning period, the monetary policy decision would be delayed by a week to September 22nd.
Sterling posted gains to a peak just below 1.1650 against the weaker dollar on Friday before a retreat back below 1.1600 as the US currency recovered ground.
The Euro retreated to below 0.8665 as firmer global risk conditions provided an element of Sterling support during the day.
CFTC data recorded an increase in short Sterling positions to a 5-week high above 50,000 in the latest week from just below 30,000 the previous week as funds sold the currency amid pessimism over the outlook. The shift will lessen the potential for further selling in the near term.
Sterling posted gains at Monday’s open with an attempted recovery from over-sold conditions. There was selling at higher levels as it failed to challenge 1.1650 against the dollar. Latest data recorded a UK GDP increase of 0.2% for July, slightly below consensus forecasts of 0.3% as industrial production declined. The impact was muted with Sterling able to hold above 1.1600 against the dollar and the Euro holding around 0.8680 as risk appetite held steady.
The Swiss franc maintained a strong tone on Friday with further net gains. There was further speculation that the National Bank would am for currency gains over the medium term given inflation differentials against other major currencies which will require nominal franc gains to keep the real exchange rate steady. Despite the hawkish ECB stance, the Euro retreated to lows near 0.9630 before a slight recovery. The dollar also dipped sharply to lows at 0.9550 before a rebound to just above 0.9600. The dollar traded just above 0.9600 against the franc on Monday with markets continuing to monitor monetary policy trends.