European FX Open - Yield plays continue to drive FX

EUR/USD continues to power higher through the 1.1100 mark as specs eye quicker Fed cuts compared to the ECB, with this week's Jackson Hole event still viewed as the likely catalyst for a bullish yield play.

Note, the yield spread between US and German 2-year bonds hit its narrowest since mid-2023 earlier this month. After widening somewhat again, it hit a two-week low on Aug. 20, data compiled by Bloomberg show.

Yesterday's data also spurred EUR gains after the ECB Current Account for June came in at Eur 50.5bln, a record high. Meanwhile in its monthly report, the Bundesbank stated that robust German wage growth isn't abating and will likely keep inflation high. Note, the crucial ECB Negotiated Wages Indicator for the Eurozone in Q2, is set for release on Thursday.

USD losses were otherwise spurred after the Philadelphia Fed Non-manufacturing Business Outlook Survey indicated a decline in firms' assessment of general business activity for August, while the Fed's Bowman said that should disinflation proceed "sustainably" towards the 2% target, rate cuts could be considered.

EUR/USD is thus running above 1.11 for the first time since December - and some suggest there could be more to go as net short positions held by leveraged traders are yet to be unwound.

Overnight, China’s central bank set its daily reference rate for the yuan broadly in line with expectations for the first time in more than a year, a sign it’s loosening its tight grip for the managed currency.

Japan’s exports rose at a faster pace in July, largely reflecting the yen’s drop to a 38-year low last month. The Bank of Japan also released a pair of research papers highlighting the persistence of inflationary pressure in the economy, indicating there is still a case to be made for another interest rate hike.

This session, UK public sector net borrowing provides the early data, while the ECB’s Panetta speaks at 12gmt.

In the US, the BLS releases preliminary annual payrolls benchmark revisions. Markets are primed for the fact that the US employment situation is less buoyant than originally seen - there could be up to one million jobs vanishing.

MBA Mortgage Applications are also due, while the FOMC minutes are out tonight.

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