Euro and pound off highs

The euro and sterling are off their highs against the dollar, having traded at over $1.20 and close to $1.35 respectively at one stage early yesterday, with both more than 1 cent lower this morning at just under $1.19 and close  to $1.33, leaving the euro-pound rate still at 89p. Core bond yields edged lower yesterday, while equity markets began the first day of September with modest gains and have opened in positive territory again today

ECB Chief Economist Philip Lane says “the euro-dollar rate does matter” for monetary policy, noting that “if there are forces moving the euro-dollar rate around, that feeds into our global and European forecasts and that in turn does feed into our monetary policy setting”. The euro’s recent appreciation will tend to dampen both growth and inflation in the Euro Area economy, all else equal

The annual rate of CPI inflation in the Euro Area fell into negative territory in August according to the flash estimate, coming in at -0.2%, the lowest level since early 2016. The core, or underlying, rate also declined, to 0.4% from 1.2% in July

The ISM measure of manufacturing activity in the US rose for a fourth consecutive month in August and at 56.0 is signalling positive growth in the sector following a fall in output in the second quarter of the year

Fed member Brainard says with “the (economic) recovery (in the US) likely to face COVID-19-related headwinds for some time”, it will be important for the Fed “to provide the requisite (monetary policy) accommodation to achieve maximum employment and average inflation of 2 percent over time”

Data due today include capital good orders and the ADP employment report in the US