EURGBP, H1
The Yen posted moderate gains in otherwise quiet, narrowly ranging currency markets. USDJPY and other Yen crosses softened. More ECB policymaker signalling about their concerns over Euro valuations elicited EURJPY selling, which tipped the cross to a two-month low at 122.38. USDJPY, meanwhile, gave back most of the gains that were seen on Friday in posting a low at 105.27. AUDJPY also saw weakness, though managed to subsequently pare most of its decline after Westpac pushed back their call for an RBA rate cut to November from October. This helped AUDUSD recoup most of the decline seen on Friday. EURUSD posted modest declines, though the low is 3 pips above the two-month low that was seen on Friday at 1.1612.
ECB members de Cos (Spain) and Visco (Italy) both said that the recent foreign exchange developments have been a worry given the disinflationary impact. Visco said that “if downward pressures jeopardise our price stability objective, we’ll have to intervene.” He added that “the monetary policy implications are obvious”. It is unlikely that Visco in this context means direct intervention on FX markets, but more likely that he is talking about further stimulus measures designed to lift the inflation trajectory, but FX traders will likely take note of his choice of words.
Policymakers from other central banks, including the BoE, BoJ and RBA have been making dovish-sounding remarks, with some, like those at the ECB, linking them to exchange rates. This has weakened the previously strong bearish sentiment that market participants had until recently. BoE MPC member Tenreyro said that she has seen “encouraging” evidence on negative interest rates. The Pound ticked higher regardless, with an FT article reporting that there are tentative signs of progress into the final round of form trade talks between the EU and UK.
In other news, Japan’s chief cabinet secretary, Kato, said that there would be no hesitation in bringing forward new stimulus measures if required. Data out of China showed industrial companies profits increased for the fourth consecutive month in August. In Europe, positive Covid test results have, for the most part, continued to soar. Covid hospitalisations and mortality, while bumping higher over the last week in many countries, still remain at very low levels relative to the March/April peak. The ratio between Covid-caused death and flu- and pneumonia-caused death also remains low, again contrasting markedly to the March/April situation. Nonetheless, the trend in most countries in Europe is for tighter restrictions and more localized lockdowns.
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Stuart Cowell
Head Market Analyst
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