LONDON, Aug 25 (Reuters) – European shares edged higher and the euro fell to its lowest since mid-June on Friday on expectations that the European Central Bank could pause its tightening cycle next month.
Investors were now awaiting remarks from the heads of the ECB and Federal Reserve at a conference in Jackson Hole for clarity on the future path of interest rates.
ECB policymakers are increasingly concerned about deteriorating growth prospects and momentum for a pause in its rate hikes is building, Reuters reported, citing sources with direct knowledge of the discussion.
Markets are split almost evenly on whether the ECB will hike at its meeting next month, compared with around a 60% chance of a September hike before weak activity data was published earlier this week.
“We’ve seen a back off in ECB rate hike expectations. The trillion dollar question is how much validation and support that gets from (ECB President Christine) Lagarde today,” said Ben Laidler, global markets strategist at eToro.
Lagarde is due to speak at 1900 GMT. Before that, Fed Chair Jerome Powell speaks at 1405 GMT and investors will be looking for clarity on whether more rate increases are in store and how long the Fed plans to hold rates high.
“I don’t think Powell is going to be declaring victory just yet because, even though inflation is coming down, there’s still some risk in the data,” said Rufaro Chiriseri, head of fixed income for the British Isles at RBC Wealth Management.
“The sentiment of higher for longer interest rates is probably going to be echoed by Powell and Lagarde. They will be erring on the side of caution, not saying hikes are gone and done and keeping that optionality on the table.”
Fed officials sent mixed signals in the final run-up to the conference. Philadelphia Fed President Patrick Harker told CNBC he doubted the central bank would need to raise rates again, but also indicated he was not ready to predict when rate cuts might begin. Boston Fed President Susan Collins said on Yahoo Finance’s video channel that rates may be near or at a peak, “but certainly additional increments are possible.”
The pan European benchmark STOXX 600 (.STOXX) index was last up 0.4% and on track for a 1.1% gain this week, which would snap a three-week run of declines.
Wall Street futures were pointing to a higher open, while MSCI’s broadest index of Asia-Pacific shares (.MIAP00000PUS) sagged 1.2%.
Japan’s Nikkei (.N225) tumbled 2%, with Nvidia supplier Advantest (6857.T) the biggest drag, dropping almost 10%.
The euro slipped to its lowest level since mid-June at $1.0766, although has since recovered to trade at $1.0808.
The U.S. dollar index – which measures the currency against a basket of six developed-market peers, including the euro – pushed as high as 104.31 on Friday, a level last seen in early June, but was last at 103.98.
“USD gains have moderated through European trade and the USD has lost minor ground against some high beta currencies as equity markets have strengthened over the session,” said Shaun Osborne, chief FX strategist at Scotiabank.
Against Japan’s currency , the dollar edged tentatively back toward last week’s nine-month high of 146.545, trading as strong as 146.26.
Tokyo consumer price data on Friday, which front-runs nationwide figures, showed inflation remained well above the Bank of Japan’s target. However, the lag in pay increases may be more pivotal for steering policy.
“We do not expect the Bank of Japan to tighten monetary policy because the spike in inflation has not spilled over to a large acceleration in wage growth,” CBA strategist Joseph Capurso wrote in a client note.
BOJ Governor Kazuo Ueda is scheduled to speak at Jackson Hole on Saturday.
Euro area and U.S. Treasury yields ticked up, the latter last sitting at 4.2512% – pulling away from the previous session’s low of 4.174% but well back from Tuesday’s peak of 4.366%, the highest level since November 2007.
In energy markets, crude prices rose on Friday, but remained on track for weekly declines. Brent crude rose $1, or 1.2%, to $84.35 a barrel, while U.S. West Texas Intermediate crude was up 99 cents, up 1.3%, at $80.05 a barrel.
Reporting by Samuel Indyk and Kevin Buckland; Editing by Jacqueline Wong, Mark Potter and Chizu Nomiyama
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