EUR/USD retreated sharply to 4-week lows around 1.0875.

The EU announced additional sanctions on Russia including a ban on coal imports from the country and a further tightening of financial restrictions.

The US is set to announce additional measures on Wednesday and also pledged to deliver further anti-tank weapons to Ukraine.

There were still doubts whether the measures would have a short-term impact with Russia looking to intensify fighting in the East of Ukraine.

There were further concerns over the impact on global inflation pressures, especially if there is a prolonged conflict, with major stresses in the food sector.

There will still be pressure for more aggressive action in the energy sector.

The ISM non-manufacturing index strengthened to 58.3 for March from 56.5 the previous month, although slightly below consensus forecasts. Production growth was little changed while new orders increased at a faster rate.

Employment moved back into expansion for the month while supply-side difficulties persisted and there was a renewed decline in inventories. Cost pressures remained strong and the prices increased edged higher on the month with a reading only marginally below record highs.

The data continued to fuel underlying inflation fears.

In comments on Tuesday, Federal Reserve Governor Brainard stated that inflation is much too high and subject to upside risks. She added that the Fed is prepared to take stronger action if inflation and inflation expectations suggest the need.

Brainard also commented that the central bank would tighten methodically through a series of rate hikes which suggested a reluctance to engage in aggressive individual hikes.

Markets, however, tended to focus on the hawkish rhetoric and there were sharp market moves as expectations shifted again.

US Treasuries were subjected to sharp selling following the comments from Brainard.

The 2-year yield moved above 2.50% and the 10-year yield also moved sharply higher with selling continuing on Wednesday with a 3-year high around 2.63% in Asia.

Higher bond yields were significant in undermining support for equities with Wall Street equities moving lower.

The surge in US bond yields was also important in supporting the US dollar in global markets.

The currency index jumped to 23-month highs as the Euro and yen were hit by sustained selling with all major currencies losing ground against the US currency.

China’s Caixin PMI services index dipped sharply to a 2-year low of 42.0 for March from 50.2 previously as covid-related lockdowns had an important impact in undermining confidence.

There were further concerns surrounding the situation in Shanghai and expectations of further supply disruptions which will exacerbate global inflation pressures as well as hurting Chinese demand.

Unease over the Ukraine situation continued to sap Euro support. The EU Commission announced further sanctions on Russia, but pressure for more aggressive action continued and there were further concerns over Russia retaliation. The focus on allegations of Russian war crimes maintained expectations that there would be no progress in peace talks.

The dollar gained strong support from the hawkish comments from Fed Governor Brainard. EUR/USD retreated sharply to 4-week lows around 1.0875 on Wednesday. Higher US yields provided strong net dollar support in global markets. USD/JPY posted strong gains to near 124.00.

Sterling was resilient overall as UK equities posted net gains. GBP/EUR jumped to 1.2000. GBP/USD, however, retreated sharply from highs near 1.3170 to near 1.3050.

The Swiss franc was broadly resilient despite higher US bond yields. USD/CHF did edge above 0.9300 to 0.9325.

Commodity currencies retreated sharply from intra-day highs against the dollar.  AUD/USD dipped from 9-month highs around 0.7660 to 0.7580. USD/CAD rallied to just above the 1.2500 level.

Economic Calendar

8:30EUR Markit Germany Construction PMI (MAR)54.9
09:00Euro - Zone Retail Sales (M/M)(MAR)0.20%
09:30GBP PMI Construction(MAR)59.1
10:00Euro-Zone PPI (M/M)(FEB)2.30%3.00%
10:00Euro-Zone PPI (Y/Y)(FEB)26.20%
10:00Euro - Zone Retail Sales (Y/Y)(MAR)9.10%7.80%
14:00CAD Ivey PMI(M/M)(MAR)60.6

*All rates shown are indicative of interbank rates and should only be used for indication purposes only. It is important to note that foreign exchange rates fluctuate and that rates may vary depending on the amount and the base currency that is purchased or sold. Rates are correct as of 8:00am UK time. CentralFX are not responsible for the rates shown.