Oil prices lower, dollar softer

The yen has strengthened notably against the dollar overnight, gaining around 1% or so, supported by the prospect of an increase in interest rates by the Bank of Japan – a 25bps hike at its meeting in a fortnight’s time is more than fully priced in – and fuelling speculation there may have been official intervention to boost the currency. This has spilt over into other dollar crosses, with an easing in oil prices also weighing on the US currency. The euro and sterling are trading just north of $1.16 and just under $1.35 respectively this morning, up from lows of about $1.1565 and $1.3475 during yesterday’s session. EURGBP has nudged up to £0.86, the first time it has been at this level since early July.

There was some respite for US government bonds with yields nudging down by 2-3bps, helped by some softer than expected (US) economic data including the ADP employment report for August. German and UK yields edged up by a few basis points, but they have opened lower this morning in tandem with the easing in oil prices (Brent crude is back below $95 p/b, down from a   high of over $97 earlier in the week).  There was also some respite for US equity markets, which rallied by around 0.5%, but European stocks ended in the red for the day, albeit very marginally so.

ECB’s Makhlouf says he feels “uneasy” that Euro area inflation is running north of 3% when the pace of economic growth is “slightly stronger” than forecast. He also notes that “the decision we’re going to make next week will not be a surprise to anybody,” essentially confirming market expectations for a 25bps hike in the deposit rate at the ECB’s meeting this day week.

Fed member Williams says “the data (on inflation) recently has been encouraging,” adding that he’s “seeing the trend in inflation moving slowly down as some of the effects of tariffs move into the rearview mirror.” Still though, he says the Fed is “collecting a lot of data” ahead of its monetary policy meeting later this month and will “reassess” the outlook for interest rates.

For the day ahead, economic data due include the ISM services index (August), trade balance (July), and weekly jobless claims in the US, while producer prices (PPI) for July are scheduled in the Euro area. A number of Fed members are due on the wires over the course of the day. These include Governor Waller, who in July noted that “when inflation is well above its target and the labour market is near full employment…any serious (monetary) policy rule calls for raising the policy rate to bring down inflation.”