Some signs of an inflation peak.

Fed Governor Brainard stated that monetary policy will need to be restrictive for some time and that the policy rate will need to be raised further, but there was no indication on the likely size of the rate hike this month. She reiterated that it was critical to guard against an increase in inflation expectations.

She did, however, note that global tightening may help to reduce US inflation pressures.

The latest Federal Reserve Beige Book stated that the rate of price increases had slowed in 9 of the 12 US Fed districts.

The New York Fed stated that global supply-chain pressures eased in August and US yields edged lower during the day.

The yen remained under heavy pressure on Wednesday with USDJPY surging to a fresh 24-year high fractionally below 145.00.

There was a sharp correction later in the session as US yields edged lower.

Bank of England Governor Bailey stated that there are dollar specific factors behind Sterling weakness with the Fed much more focussed on bringing the demand shock under control, although he did admit that there is a UK story behind Sterling weakness as well.

Bailey added that the government’s plan to cap surging energy costs could slow inflation, but it was too soon to say what that will mean for interest rates. He also expressed concerns over the potential risk of an increase in inflation expectations given the surge in the headline rate.

MPC member Tenreyro stated that the bank should proceed slowly when there is a lot of uncertainty and a gradual increase in rates reduces the risk of over-shooting. She added that without a rate hike in August rates were sufficient to return inflation to target.

Chief economist Pill expressed that there was a high degree of uncertainty which makes it difficult to have a strong view.

Sterling dipped sharply on Wednesday amid fears over the outlook. GBP/USD briefly dipped below the March 2020 flash-crash low for a 37-year low just above 1.1400 before a recovery to just above 1.1500.

The fiscal support package will be announced officially on Thursday.

The Bank of Canada increased interest rates by 75 basis points to 3.25% from 2.50% which in line with expectations and the highest level for 14 years.

The bank expects to increase interest rates further while growth in the economy is forecast to slow.

The ECB will announce its latest policy decision on Thursday with market forecasts split between a 50 and 75 basis-point rate hike, but with a majority backing a 75 basis-point increase.

As well as the rate decision, markets will be watching forward guidance from the bank closely.

German industrial production declined 0.3% for July after a 0.8% increase previously. The Euro remained on the defensive in Europe with further fears over the economic outlook. The dollar strengthened after a Wall Street report that the Fed could decide on a 75 basis-point rate hike this month.

EUR/USD dipped to lows below 0.9880 but managed to hold above 19-year lows posted on Tuesday. The dollar retreated from intra-day highs as US yields declined. EUR/USD rallied to parity and traded just above this level on Thursday despite selling above this level.

USD/JPY retreated from the 24-year high marginally below 145.00 to trade just above 143.50. The Swiss franc overall was held in relatively narrow ranges. USD/CHF failed to hold above 0.9850 and dipped below 0.9800.

Sterling recovered from intra-day lows as the dollar retreated and risk appetite improved. After a fleeting dip to below 1.1410 and the lowest figure since 1985, GBP/USD recovered to above 1.1500.

The Bank of Canada rate decision was in line with expectations. The Canadian dollar recovered from intra-day lows despite a further slide in oil prices. USD/CAD dipped to 1.3110 from highs just above 1.3200.

Reserve Bank of Governor Lowe stated that the pace of rate hikes is likely to slow as the level increases. AUD/USD recovered to 0.6760 from 0.6700 on Wednesday before drifting lower again on Thursday after Lowe’s comments.

Economic Calendar