- The move higher in yields in recent weeks presents a challenge to the ECB.
- EUR/USD remains capped by daily resistance.
EUR/USD is flat in the open this week at 1.1645 at daily resistance with the US dollar trying to hold up. Investors have taken profits since the dollar index hit a one-year high last week as they build expectations for sooner rate increases in other currencies. However, the dollar pared losses on Friday and Treasury yields fell after Federal Reserve Chairman Jerome Powell said the US central bank should begin reducing its asset purchases soon, but should not yet raise interest rates.
However, there were no massive surprises in his comments but he said the impacts from global supply-chain constraints are having a longer-lasting effect on prices. Nevertheless, he still expects inflation to move back towards 2% over time. This led to US rates selling-off initially with 10y UST yields down sharply to 1.63%. US equities were also lower.
In US data, Markit Manufacturing PMI dropped more than expected in October, to 59.2 vs the expected 60.5. However, the service index improved more than expected, to 58.2 vs the expected 55.2). ''The impacts of the supply-chain constraints were evident in the details, with the indices for input prices rising to series highs,'' analysts at ANZ Bank explained. ''Likewise, measures of backlogs and manufacturing times were also the highest on record.''
Domestically, the preliminary composite PMI for October fell to 54.3 vs the expected 55.2. This was in large part attributable to a decline in activity in the German service PMI which fell by 3.6pts to 52.4. Meanwhile, the EA manufacturing PMI was relatively stable, falling 0.1pts to 58.6. ''The data suggest that growth in Q4 for Europe will slow, but with the recovery, still intact,'' the analysts at ANZ explained. ''Encouragingly, the composite employment index rose 1.2pts to 56.1 and the future output index rose 0.3pts to 67.2.''
ECB in focus
Looking ahead to the week, the European Central Bank is what matters most. ''While October was meant to be a simple placeholder meeting on the road to the Governing Council's big December "re-assessment" of its policy stance, the move higher in yields in recent weeks presents a challenge,'' analysts at TD Securities explained. ''While we think words are more likely than actions, an increase in the pace of PEPP purchases can't be completely ruled out.''
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