Hawkish ECB Talk & Ukraine Counteroffensive Bolster European FX, Yen Sags

Activity quietened down after the re-open, which saw the European FX bloc catch a bid on the back of regional headline from over the weekend. Most of ECB members kept beating the hawkish drum, while Ukraine continued to make significant territorial gains in its counteroffensive in the Kharkiv region.

• The Eurozone's single currency paced gains, bolstered by the latest round of ECB speak. Bundesbank chief Nagel signalled the need to keep tightening monetary policy in pursuit of the inflation target, while Reuters reported that the Bank could raise its key interest rate "to 2% or more," which falls broadly in line with current market pricing.
• EUR/USD climbed to a fresh three-week high of $1.0127 and cable topped out at a new monthly peak of $1.1666 in early Asia-Pac trade, before both pairs gave away some gains with initial impetus moderating. The Scandies traded in a similar fashion.
• The yen underperformed its G10 peers despite another warning shot from a Japanese official. Dep Chief Cabinet Sec Kihara said that Japan needs to "take necessary steps while closely monitoring developments including excessive, one-sided moves in the exchange rate."
• Reports of a planned relaxation of Japan's border controls and a pullback in U.S. e-mini futures failed to lend any support to the beleaguered yen, with monetary policy divergence still weighing on the yen.
• USD/JPY extended gains as U.S./Japan yield spreads widened, with 10-Year differential up ~2.5bp. The yield on 10-Year JGBs operated in the vicinity of the 0.25% cap imposed by the BoJ as part of its Yield Curve Control framework.
• The Antipodeans traded on a softer footing. AUD/NZD climbed to NZ$1.1254, just shy of cyclical highs printed on Aug 26, but retreated into negative territory as the session progressed even as Australia/New Zealand 2-Year swap spread remained afloat.
• Public holidays in mainland China, Hong Kong and South Korea thinned out liquidity in Asia.
• Focus turns to monthly UK activity indicators, as well as comments from ECB's de Guindos and Schnabel.