The Euro experienced a notable spike against the US Dollar after the US Treasury announced an increase in buyback volumes of longer-dated Treasury bonds, which led to a flattening of the bond curve and pulled the 10-year US Treasury yield down to 4.64%, 10 basis points below Tuesday’s peak [1]. This adjustment in US yields only partially transmitted to European markets, where primary issuance remains active with numerous SSA and covered bond deals [1].
The FOMC minutes from the July meeting in the US contained no major surprises, but revealed diverging views on inflation. 'Many' participants assessed that further policy tightening would likely be necessary if inflation did not decline, while some noted that financial conditions might not be sufficiently restrictive to return inflation to the 2% target. This is consistent with hold-voters signaling openness to future rate hikes following the meeting [1].
In the euro area, final inflation data confirmed the flash estimate of 2.9% year-on-year, with core inflation at 2.5% year-on-year. Underlying inflation measures were broadly unchanged, with only small increases, suggesting inflation remains sticky but price pressures have not risen significantly following the energy shock [1]. The Q2 Labour Cost Index eased to 3.1% year-on-year from 3.2% in Q1, indicating moderating wage pressures that should act as a disinflationary force [1]. Danske Bank expects only one further 25 basis point rate hike from the ECB [1].
The ECB is set to publish the minutes from its July meeting, at which policy rates were left unchanged. The expectation is that the minutes will show a bias towards a rate hike in September, which is already fully priced in by markets. Guidance beyond September is likely to remain limited [1].
CONCLUSION
The US Treasury's increased buyback volumes of longer-dated bonds triggered a rise in the Euro against the Dollar, with US yields falling and only partial spillover to European markets. Inflation and wage data in the euro area suggest moderating pressures, supporting expectations of limited further ECB rate hikes. Market sentiment remains cautiously positive, with a September ECB rate hike fully priced in.