The Japanese yen was in the limelight in early trade

18 Sep 2023 , 10:37 AM

With the exception of sterling, most major currencies were flat in early trade on Monday as a Japanese holiday and a number of scheduled central bank meetings sapped market momentum.

After Governor Kazuo Ueda fuelled rumours of an impending shift away from ultra-loose policy, the Bank of Japan’s policy meeting on Friday is the focus of the week in Asia. In a week filled with central bank meetings, the U.S. Federal Reserve and the Bank of England both have decisions that are due on Wednesday and Thursday, respectively.

The euro increased by 0.11% to $1.0667 while the dollar index was slightly lower at 105.23. Sterling last traded at $1.2397, up 0.06% for the day.

The majority of investors believe that divergences in economic growth and yields will support the dollar, particularly when compared to the euro. Since mid-July, the pound has lost about 6% of its value against the dollar, while the euro has lost more than 5% as both the UK job market and economy and the euro zone’s economy stagnated.

Last week, the European Central Bank increased interest rates to 4%, but warned that this could be the final increase.

Cash Treasury bonds were not traded on Monday since Japan was closed.

Due to rising government expenditure and the expectation that the Fed will keep rates high for longer periods of time in order to contain inflation that is still over target, U.S. Treasury yields have been moving higher, with the two-year yield crossing the 5% mark and increasing by 25 basis points this month. The U.S. retail sales statistics from the previous week contributed to further lowering the likelihood of recession.

Only a 3% possibility is assumed by futures markets that the Fed will increase interest rates at the conclusion of its two-day meeting on Wednesday.

Interest rates are likely to be increased by the Bank of England this week, and markets are already anticipating a break in the protracted tightening cycle that has officials concerned about the slowing economy.

In addition, UK inflation data for August is due on Wednesday, just before the conference.

The growth-inflation conundrums facing central banks are also becoming more complicated as a result of rising oil costs. The price of oil is also expected to rise by the most since Russia’s invasion of Ukraine in the first quarter of 2022.

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