The ECB will remain concerned over inflationary pressure, especially with high energy prices, and will therefore be reluctant to drop its tightening bias on interest rates. The Euro-zone economic data is liable to remain mixed and the net risk is for a significant slowdown in growth. There will be increasing concern over the impact of a strong Euro if demand falters. There will also be pressure for more aggressive central bank co-ordinated efforts to prevent further rapid Euro gains at the forthcoming G7 meetings.
The Euro has had a strong tone over the week, especially against the yen and Swiss franc while it also rebounded strongly from retreats against the dollar and Sterling. There was a partial retreat from highs against the dollar and yen late in the week.
The industrial-sector data was generally firm with solid manufacturing output increase for France and Italy. The Sensix index of wider Euro-zone confidence fell again for September, although the rate of decline slowed.
The ECB was concerned over inflationary pressure with Bundesbank head Weber stating that the bank may need to pursue a restrictive policy.
ECB officials continued to warn over excessive currency movements. Their main focus was on the need for Asian currency gains rather than protesting against the dollar's value.
Eurogroup head Juncker warned that intervention did not have to wait for the G7 meetings from October 19. The Euro dip in US trading on Thursday invited some speculation over covert central bank intervention.
Yen
The Bank of Japan did not increase interest rates at the October meeting and the yen will, therefore, remain vulnerable to selling pressure on yield grounds, especially if global risk tolerances remain high. There will still be reservations over aggressive asset allocations overseas which will provide some protection. There will also be further pressure for stronger Asian currencies to ease upward pressure on the Euro. Overall, the yen should be able to avoid heavy selling even if carry trades trigger further short-term losses.
The yen has tended to weaken as fresh enthusiasm for carry trades has increased capital outflows. The dollar and Euro both pushed to two-month highs with the US currency peaking around 117.80 with Euro gains to 167.70.
The Bank of Japan left interest rates on hold at 0.50% following the latest policy meeting by an 8-1 vote with the dissenter calling for higher rates.
Bank Governor Fukui repeated his comments that policy should be adjusted gradually with some hints over that a December rate increase was realistic.
The industrial data was subdued with a core 7.7% drop in machinery orders for August to give a 2.6% annual decline. The current account remained in strong surplus with a JPY2.08trn August surplus, although this was lower than expected.
The yen was still undermined by fresh interest in carry trades with the capital account recording net outflows in the latest week.