US ADP jobs data was weaker than expected while Federal Reserve rhetoric remained dovish.

US ADP jobs data was weaker than expected while Federal Reserve rhetoric remained dovish. The dollar was still able to make net gains amid underlying pressure for a correction after sharp losses.

The Euro was hampered by speculation over further ECB protests against a strong currency with EUR/USD near 1.1800.

Risk appetite was underpinned by expectations of sustained central bank liquidity provisions and coronavirus vaccine hopes. US equities posted fresh record highs, although Asian markets were slightly more cautious. Sterling held a firm overall tone despite Bank of England reservations over the outlook. GBP/USD dipped amid the firm dollar.

Commodity currencies were undermined by US currency gains. Oil prices declined despite a substantial inventory draw amid a dip in gasoline demand. Precious metals declined sharply amid equity gains and a firm dollar.

The Euro was unable to gain traction ahead of Wednesday’s New York open with further reservations over the potential for ECB protests against Euro strength. There were further reports that the ECB was concerned over currency strength and there will be speculation over rhetoric to curb the advance at next week’s press conference.

US ADP data recorded an increase in private-sector payrolls of 428,000 for August and well below consensus forecasts of a 950,000 increase for the month. There was only a small upward revision to July’s data to 212,000 from the 167,000 reported originally, although confidence in the data was limited. The New York ISM business conditions index declined to 42.9 from 53.5 previously, increasing concerns that the economy could be losing momentum.

New York Fed President Williams stated that the new policy framework makes it clear that the Fed seeks maximum employment and to eliminate shortfalls. The central bank has reached the 2% inflation target briefly, but the challenge is to sustain it and an overshoot of the 2% target is desirable at present. According to Williams, the Fed has learned that there is no need to be pre-emptive on inflation, although he also warned that there is a risk that people think the Fed can do more than it can. He added that even the topic of raising interest rates is not one to focus on now and underlying tone was notably dovish.

Cleveland Fed Mester stated that the US economic recovery appears fragile while a sustainable recovery requires further fiscal support. San Francisco head Daly reiterated that the role of fiscal support had never been stronger. Although the Fed rhetoric was again dovish, the dollar was able to make corrective net gains with EUR/USD retreating to lows near 1.1825 before a limited recovery. The dollar maintained a firmer tone on Thursday with EUR/USD edging to just below the 1.1800 area.

The dollar edged higher into Wednesday’s US open amid a firm underlying tone while the yen was hampered by expectations that current Cabinet Secretary Suga would secure the LDP leadership in this month’s election and look to maintain the current economic policy framework.

The Federal Reserve Beige Book stated that economic gains were generally modest and activity remains well below pre-covid levels. Commercial construction and real estate remained in contraction, but residential construction was robust. Employment gained, but there was evidence of a slowdown while companies reported labour shortages due to childcare issues. Despite calls from Fed officials over the importance of fiscal support, there was no progress surrounding stimulus talks.

US equities gained further traction during the session which limited potential defensive yen demand and USD/JPY made net gains to the 106.25 area.

Markets continued to expect Suga would win the LDP leadership election which would imply policy continuity and lessen any potential upward pressure on the yen. Asian equity markets were mixed and there was no further improvement in the Chinese Caixin services PMI index with USD/JPY around 106.30.

EU Chief negotiator Barnier reiterated his concerns over a lack of progress in trade talks with particular concerns over the recent round in London. He called for the UK to make a move to break the deadlock now in order to meet the firm end-October deadline. He stated that the EU was prepared to make concessions on fisheries if the UK was also prepared to move. Markets continued to expect that political dynamics would lead to last-minute concessions.

Bank of England officials remained cautious over the outlook with warnings over the threat of permanent scarring. Governor Bailey stated that inflation was likely to be slightly higher than expected as VAT rate cuts had not been passed on as much as expected, but officials also stated that there was room to increase quantitative easing further if necessary. There was further speculation that the bank would increase the number of bond purchases in the autumn.

Despite the cautious comments, Sterling was again resilient with expectations of very dovish policies by other central banks continuing to offer protection. GBP/EUR ground higher towards 1.1250 while GBP/USD found support below 1.3300.

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