Euro weakens: ECB faces deflation risks

Currencies

The U.S. dollar (USD) and Japanese yen (JPY) emerged as the strongest performers in today’s trading session.

Japan’s industrial production index for August, on a seasonally adjusted basis, contracted by 3.3% month-over-month, aligning with expectations. Year-over-year, the decline stood at 4.9%, reflecting ongoing challenges in the manufacturing sector. Despite the dip, the yen’s safe-haven appeal remains intact.

Minneapolis Fed President Neel Kashkari signaled potential for moderate rate cuts, emphasizing that policy still leans on the restrictive side. Known for his dovish stance, Kashkari’s comments underscore the balancing act between maintaining economic growth and easing monetary conditions.

Europe Inflation

Across Europe, soft inflation prints in Spain and France highlight an emerging deflationary risk. This shift increases the likelihood of the European Central Bank (ECB) adopting a more aggressive easing stance in upcoming meetings, dragging the euro lower against the dollar. Following this sentiment, EUR/USD faced renewed pressure, while EUR/GBP continued its downward trajectory.

United Kingdom Employment Data

• Unemployment Rate (August): 4.0% (Forecast: 4.1%; Previous: 4.1%)
• Employment Change 3M/3M: 373K (Forecast: 250K; Previous: 265K)

The UK’s labor market data reflected a mixed picture, with the unemployment rate ticking down slightly to 4.0%. However, the continued decline in payrolls suggests lingering concerns. Pay growth showed signs of cooling, and real wages fell over the past quarter. This development may ease some of the pressure on the Bank of England as inflation concerns wane.

Commodities

• Gold: Holding steady around $2,638 during European hours, gold found support amid ongoing geopolitical concerns centered on the Middle East. Despite a brief pullback from last week’s highs, persistent uncertainty in the region continues to bolster the safe-haven asset.
• Oil: WTI extended its losses for the third consecutive session, trading near $71.10 per barrel. Market participants remain cautious as geopolitical risks evolve.