It has been a quiet start to the week ahead of a plethora of central bank policy meetings as the US Federal Reserve kicks off its two-day gathering later today. 10-year US treasury yields made a fresh attempt to breach the year’s high, but weaker than expected US data kept a lid on yields and pushed the dollar index a touch lower. The single currency managed a small rally against the greenback, climbing from support at 1.0660 to test 1.07 after Reuters reported that ECB policymakers are considering raising reserve requirements to tackle excess liquidity. Mixed messages came from ECB officials with Governing Council member Martins Kazaks saying it would be a mistake to bet on rate cuts early next year. However, vice governor of the Bank of Portugal Clara Raposo said that the central bank may see inflation returning to its 2% target sooner than currently forecast.
This morning we await the release of euro area HICP inflation data for August, which is expected to show that underlying price pressures are easing. Core and services inflation have fallen slightly on the month, suggesting a pause in interest rate hikes from the ECB after last week’s 0.25% hike. The headline reading is expected to flatline at 5.3% in August, with the core declining, as analysts forecast a significant drop in September, with inflation falling further from then on.
The pound remains under pressure with GBPUSD trading below 1.24 ahead of the BoE policy meeting later this week. The pound is softer against both the euro and the US dollar and a test of the May low of 1.2308 in cable cannot be ruled with rallies becoming harder as the MPC gets ever closer to the end of its interest rate hiking cycle.
