Core bonds fell prey to a small profit taking move yesterday. Triggers from a European side were EMU PMI’s and Minutes of the ECB meeting. Headline PMI’s beat forecasts, but we add that underlying details remain weak. ECB Minutes managed to lift inflation expectations with members willing to counter concern among market participants that the ECB lacked instruments to guide inflation towards the 2% inflation target. On the US side, several regional Fed Presidents joined a “campaign” against cutting interest further in September with the economy still in a good place and inflation near target. Boston Fed Rosengren and Kansas City Fed George, who both voted against easing action in July, were the first this week to plead against additional action. They were joined by non-voting member SF Fed Daly and now Philly Fed Harker (non-voter). The latter said yesterday that “we’re roughly where neutral is right now and I think we should stay here for a while and see how thing play out”. Dallas Fed President Kaplan (non-voter) was a little more balanced. He said that its possible to lower rates again in September. He doesn’t want to wait before the US consumer is showing weakness, because than you’ve probably waited too long. He therefore watches closely to see if weakness in global manufacturing activity seeps into the services sector and leads to a slowdown in hiring. The combined comments of regional Fed governors caused some minor scaling back in the aggressive easing cycle markets are currently discounting. US yields rose by 3.7 bps (2-yr) to 2.5 bps (10-yr) in a daily perspective. German yields rose by 2.1 bps (5-yr) to 4.2 bps (30-yr).

EUR/USD twisted and turned yesterday within this week’s very narrow 1.1060-1.1110 trading range. Fed governors had the final say, enforcing the greenback and pulling the pair towards the lower bound where it changes hands this morning. USD/JPY is near a test of first resistance at 106.78/107.21. Sterling rallied after Johnson/Merkel and Johnson/Macron talks showed some willingness to adjust small parts of the negotiated Brexit deal in order to avoid the UK from crashing out by the end of October. EUR/GBP tested the 0.91 support area and the decline in the pair accelerated after the break lower. The fair finished the session at 0.9044. Next support stands at 0.90 which is 38% retracement of the May-August rally in EUR/GBP.

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Asian stock markets trade up to 0.5% higher. Japanese inflation (ex fresh food) remained as expected at 0.6% Y/Y in July. Core bonds lose some additional ground. All eyes are on Fed Chair Powell’s speech in Jackson Hole today. We still expect the Fed Chair to lay the ground for additional easing in September. Such scenario is by and large discounted. One might conclude that US Treasuries are prone for more profit taking both in case Powell hints at a September rate cut and in case if he remains reluctant like Fed governors recently. If so, we might get a test in EUR/USD of nearby support (1.1027/1.1060). We add though that markets won’t be running ahead of themselves too much as this weekend’s G7 Summit in France will undoubtfully produce some market-moving comments by US President Trump.

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RBNZ governor Orr said that the New Zealand central bank can afford to watch, wait and observe what is happening after cutting the policy rate by 50 bps (from 1.5% to 1%) early this month. Markets scaled back bets of additional action by the RBNZ in September, lifting NZD/USD towards the high 0.63-zone. Orr added that the RBNZ’s working basis is to keep side-lined until November and that they are willing to cut than if necessary.


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