Markets Mark Time, Dollar Consolidates Losses

After falling to new lows for the year against several major currencies in response to disappointing retail sales and uninspiring CPI before the weekend, the US dollar has begun the new week on a more stable note. It is firmer against nearly all the major currencies, though is mixed against the emerging market currencies.   

The greenback’s gains have not been very impressive. Nor have they exceeded important technical levels. Short-term participants appear caught between the strong upside momentum by the major foreign currencies and concerns that a key driver, the ECB may try to discourage the market from getting too far ahead of itself in tightening financial conditions.  

Draghi can be expected to emphasize that the ECB extraordinary monetary policy is aimed at putting inflation on a sustainable and durable path toward its target (near but below 2%). It is using all the appropriate tools in its mandate to achieve its legal objective. As of last month, it judged that its goal was still not achieved and that the accommodative monetary policy would continue until its objective was reached.  

The German 10-year bund yield rose from 23 bp on June 26 to nearly 62 bp last week. It is at 57.5 bp today. The 50 bp was an important hurdle on the way up, capping yields in January and against in March and May. This will be an important area to watch as yields pull back. In comparison, Italy’s 10-year yield rose from 1.87% to 2.35% in the same period.  It is now at 2.25%.  

While many, like ourselves, expect the ECB to continue to buy bonds well into next year, there is some thought being given to the possibility that as it reduces its purchases, the ECB focuses on some particular asset classes, like corporate bonds and asset backed securities. Draghi’s press conference will be closely watched for clues, but the policy announcement is more likely to come in September than now. There is no urgency now, and there will be new staff forecasts available, which the ECB seems to like to link to policy changes.