The Euro pulled back after peaking to 1.4760 earlier in the session as inflationary concerns eased on the back of falling oil prices. However, in a Bloomberg interview earlier this morning, ECB member Lorenzo Bini Smagh reiterated the central bank’s hawkish outlook as he said inflation is ‘too high,’ and must be brought back in line with the bank’s target.
Talking Points
· Japanese Yen: Inflation Hits 10 Year High, Retail Sales Rise on Gas Receipts
· Pound: Slight Improvement In Consumer Confidence
· Euro: Inflation Outlook Eases, As Confidence Declines
· US Dollar: Personal Spending, Personal Income, and U. of Michigan Confidence On Tap
The Euro pulled back after peaking to 1.4760 earlier in the session as inflationary concerns eased on the back of falling oil prices. Lower oil prices has helped to improve the growth outlook for the Euro-Zone as the services confidence index unexpectedly increased to 3 from 1 in July, while the consumer confidence index inched higher to -19 from -20. Conversely, the economic, industrial, and business confidence weakened as the growth outlook remains dim.
Industrial confidence fell more than expected to -10 from -8, while economic confidence took the biggest plunge as it slipped to 88.8 from 89.5. Business confidence also weakened as the index slipped to -0.33 from -0.21, with firms downgrading growth expectations as foreign and domestic demand begin to fade. On a brighter note, the CPI estimate fell more than expected to 3.8% from 4.1% in July, which may help the ECB to soften their hawkish outlook. However, in a Bloomberg interview earlier this morning, ECB member Lorenzo Bini Smagh reiterated the central bank’s hawkish outlook as he said inflation is ‘too high,’ and must be brought back in line with the bank’s target. The hawkish rhetoric suggests that the bank will continue to hold rates steady at 4.25%, and has led market participants to reduce expectations of a rate cut later this year.
The GfK consumer confidence index rebounded from multi-decade low of -39 to -36 in August. Amid the minor improvement, market participants continue to hold a dour outlook for the UK economy as inflation remains well above target, while employment conditions worsen. Downside growth risks for Europe’s second largest economy may heighten as the housing and financial sector remains under stress. Meanwhile, consumers continue to cutback on spending as they deal with higher living costs. As the BoE faces the dual mandate of maintaining price stability and fostering economic growth, next week’s rate decision by the MPC may give some insight on what the central bank will do over the coming months.
The personal income and spending reports are expected to weaken as the effects of the fiscal stimulus fade. The news may undue the optimism that was generated by yesterday’s GDP report. Manufacturing data in the form of Chicago-PMI will also weigh on dollar sentiment as expectations are that the region fell into contraction as a stronger dollar weighs on overseas demand. A pending Labor Day holiday in the U.S. may lead to a low volume day which could lead to choppy price action.
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