We are entering the last trading day of the month after what has already been a fairly choppy week for FX. Markets have been coping with the dual risks of China and also events in the Ukraine. The effects have been felt across a range of currencies, with EURCHF near 10 month lows, the yen strengthening and the Aussie under modest pressure. There have been two points of interest overnight. The first has been stronger production data in Japan, together with slightly softer inflation data, although impact on the currency was limited. The other has been the further fall in the Chinese currency, by nearly 1%, adding to the increased volatility already seen over the past week.
For today, expect volatility to remain elevated. Inflation data is released in the Eurozone at 10:00 GMT, with risks of a weaker outturn than the 0.7% expected on the back of lower reading from Germany yesterday. A reading of 0.7% or lower would increase risks of the ECB acting next week to further stimulate the economy, although the options are quite limited at this point in time given that rates are already at 0.25% and the alternatives are unlikely to have a “big bang” impact. For the dollar, note that we are likely to see a substantial downward revision to Q4 GDP at 13:30 GMT. The dollar was lower in the European close yesterday as Fed Chair Yellen spoke. She kept with the view that it’s going to take a lot to push the Fed from its path of steady tapering and suggested that the forward guidance linked to unemployment is likely to be ditched.