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European Session – Dollar maintains 121 yen handle, euro steady on Eurozone inflation data

After recent market turbulence due to China concerns, focus was back on the Fed and on the weekend’s annual Jackson Hole symposium for central bankers. All eyes were especially on FOMC policymakers for any hints on whether the Fed will move as early as September to raise rates. The general tone out of the meeting was that the Fed is still on track for a rate hike before year-end and a move in September could not be ruled out. Fed Vice Chairman Stanley Fischer’s remarks on US inflation implied there could be a rate rise soon.

US economic data due this week could provide more clues on whether the Fed might raise rates as soon as its September 17 meeting. Nonfarm payrolls data on Friday will be closely watched by the Fed, as will other data on US factory orders, trade data and PMIs. Strong data would lift the dollar and would bolster expectations for a Fed rate rise in September.

In today’s European session the dollar remained above the key 121.00 yen level, reaching as high as 121.35. It slipped to 121.09 after US data on the Chicago PMI which was slightly worse-than-expected at 54.4 in August versus 54.7 forecast.

The euro traded above the key 1.1200 level against the dollar, supported by Eurozone inflation data. Headline inflation remained unchanged at 0.2% year-on-year in the flash reading for August. But because forecasts were for the inflation rate to fall to 0.1%, today’s number was taken more favourably by the markets and was positive for the euro. Meanwhile the core CPI, excluding food, energy, alcohol, and tobacco, was stronger-than-expected, coming in at 1.0% year-on-year, versus estimates of 0.9%. While inflation is still considered weak, it is unlikely that the ECB will take action at its meeting this week. There has been some concern recently that the ECB would consider expanding its current 60 billion euros a month asset-buying programme. The Bank’s Executive Board member Peter Praet said last week that the central bank is ready to expand or extend its quantitative-easing program if needed on inflation risks.

Sterling was mainly confined to a range against the dollar during the European session, with little movement due to the UK Bank holiday today. The session low was 1.5391 and the high was 1.5435. The main risk for the pound this week lies with the release of UK PMIs for the manufacturing, services and construction sectors.

The next important event coming up in Tuesday’s Asian session will be the Reserve Bank of Australia’s policy meeting. The Bank is expected to keep the cash rate unchanged at 2.0%. The aussie slipped to 0.7097 versus the greenback during the European session, down from a day’s high of 0.7157.

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