On Friday at Jackson Hole, ECB president Christine Lagarde said that EU rates will need to stay high “as long as necessary” to bring inflation down. At face value this sounds hawkish. However, the ECB needs to manage this in the face of a stagnating economy.

Fed Chair Powell’s delivery at Jackson Hole had a hawkishness to it. He said that “although inflation has moved down from its peak…it remains too high.” This comes after the Fed’s 11 rate hikes since the beginning of 2022, which has the target range currently at 5.25%-5.5%. At face value, this seems restrictive, however labour markets are still tight, and GDP is still growing at a fair pace.

The pair is subdued today as markets await Friday’s speeches by Fed’s Powell and ECB’s Lagarde at Jackson Hole Symposium, amidst uncertain monetary policy outlook

The pair hit new 2023 lows after poor preliminary PMIs from Europe, but the subsequent UK prints sent it higher, as markets contemplate their impact on monetary policy outlook

Constrained economic activity in the Euro Area is negatively impacting the EURUSD and influencing ECB policy. As such, the currency pair is sensitive to economic releases. Whilst the central bank has inflation foremost on its mind, the level of Euro Area slowdown cannot be ignored. Flash PMIs that were released today continue to indicate a challenging environment, implying contraction in both the manufacturing and services sectors.

The 10-year real yield and dollar were showing signs of moderation earlier today. However, both instruments’ trend-following indicators have now crossed up.

The 2-year yield serves as a good general proxy for monetary policy direction. The top chart shows the German 2-year yield, representing European monetary policy, and the chart underneath is the US 2-year yield. Since mid-July, the German 2-year has been trending down and the US 2-year has been trending up.

The pair is running a losing month, which puts it in a precarious position, despite prospects for more tightening by the Bank of England given high elevated inflation and wages

The 10-year real yield, adjusted for inflation, continues to climb. It is trading close to 2% at 1.96%. The last time real yields were at these levels was back in June 2009. This post-inflation yield will be appealing to a significant number of investors, adding increased rivalry for stocks, particularly stocks with elevated valuations. The daily candles in Chart 1 show that the 10-year real yield has charted a higher…

The Peoples Bank of China has stepped up efforts to defend the renminbi. The Chinese currency has been declining off the back of poor economic data and woes in its property sector. This includes a weakening in exports and fragile consumer confidence.