Dollar remains on the front foot

The dollar advanced over the course of last week, most of its gains coming after the Fed’s hawkish interest rate hike on Wednesday. The euro and sterling both lost a cent or so against the US currency and kick off this week trading at about $1.1475 and $1.3375 respectively. EURGBP traded between £0.8550 and £0.86 last week and opens this morning at around £0.8575. Looking to the week ahead, the main economic data due are Wednesday’s flash PMIs in the main economies, while there is a whole host of central bank members scheduled to speak. Also, Trump and and China’s Xi meet in Washington on Thursday.

This month’s round of central bank meetings saw, among others, the Fed and ECB both raise their respective policy rates by 25bps but the Bank of England (BoE) again stay on hold. The market sees a roughly 50/50 chance that the Fed and ECB will hike by 25bps again next month, and about an 85% chance that the BoE will hike by 25bps at its next meeting in November. Looking further out, the market is pricing in circa 75bps of hikes in total from the ECB and Fed, and about 100bps in total from the BoE, by the middle of next year.

Government bond yields in the main markets backed up on Friday, after a respite of sorts on Thursday. The short-end led the way with 2-year yields rising by 6-10bps, while 10-year yields closed 4-7bps higher on the day. A good chunk of the increase in yields is being reversed at the open this morning though, helped by an easing in oil prices with Brent crude slipping to under $102 p/b. Meanwhile, in equity markets, European stocks shed around 1% on Friday, while US indices ended mainly in the black albeit chalking up very modest gains. The futures market points to a positive open for both today though.

The ECB’s latest survey of (Euro area) consumers inflation expectations showed an increase in both sh0rt- and medium-term inflation expectations in August. Expectations for inflation over the next 12-months rose to 3% from 2.9% in July, while 3- and 5-year ahead inflation expectations increased to 2.9% and 2.5% respectively from 2.7% and 2.4% in July, all of which will be of some concern to the ECB.

For the week ahead, as mentioned, flash PMIs for September are due in the main economies on Wednesday. Euro area consumer confidence (September) and money supply/credit growth (August) are scheduled for Tuesday and Friday respectively, while public finances (August) and consumer confidence (September) and due in the UK on Tuesday and Friday respectively also. In the US, there’s weekly jobless claims on Thursday and capital goods orders (August) on Friday.