By Craig Erlam
A relatively quiet start to the week from an economic data perspective, but we saw some decent moves in the markets, particularly in the Japanese yen.
The yen jumped on Monday on the back of comments from Bank of Japan Governor, Kazuo Ueda, who hinted that interest rates may not be negative for much longer.
Ueda reportedly claimed that if they become confident that prices and wages will keep rising sustainably, which could be as early as year-end, then an end to negative interest rates could be one option on the table.
The focus for so long has been on the central bank’s yield curve control policy, but perhaps these comments suggest abandoning that will not be the first major move.
Of course, at a time of so much speculation around currency intervention and a rapidly weakening yen, you have to wonder what the real motivation behind these comments is and how seriously to take them. Only time will tell but for now, they’ve managed to give the yen a boost.
Downgraded growth forecasts for eurozone
The European Commission downgraded its forecasts for the EU this year and next, weighed down by much weaker growth in Germany.
The new forecasts won’t come as a major surprise and may even prove overly optimistic over time, but they do come days ahead of the next ECB meeting and could tempt some policymakers into voting to pause the tightening cycle.
ECB policymakers will obviously be armed with their own forecasts when it comes to the vote, but it’s likely their growth expectations will be revised lower on the basis of recent releases.
While markets are currently pricing in a pause this week, of around 60/40, traders are leaning more toward a final hike before pausing in October.
It’s probably easier to justify a hike this week than it may be at the end of next month and it’s not sure there’s enough desire at the ECB to stop at the current rates.
Weaker economic readings will probably drive a lively debate and they obviously won’t suggest, if they do hike, that it’s job done, rather more finely balanced. But they can’t ignore the progress in recent months, other economic indicators and lag effect of past moves.
Oil steadies around $90
Signs of stabilisation in China didn’t give oil prices much of a lift on Monday, with Brent and WTI trading a little lower. While the annual CPI reading moved back into positive territory and new loans improved, traders are cautious about the outlook, so are refusing to get carried away with the figures.
Oil prices have also been tearing higher again in recent weeks, aided by the Saudi/Russian decision to extend output restrictions until the end of the year.
Brent is trading around $90 where it has stalled over the last week. A sustained break above would be a big psychological move and trigger a lot more speculation about triple-figure oil again, something we haven’t seen in a year and could complicate the inflation and interest rate outlook.
Gold edges higher on weaker dollar
Gold has steadied since the middle of last week after falling on the back of some better economic data from the US. Naturally, the focus is now on Tuesday’s inflation report ahead of next week’s Fed meeting, but the yellow metal is climbing a little as the dollar eases off its recent highs.
If it adds to these gains it could face resistance once more around $1,950 where it ran into difficulty a couple of weeks ago.
Craig Erlam is Senior Market Analyst, UK & EMEA at OANDA
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