Volatility was subdued during Tuesday with low volumes on seasonal grounds dampening activity.

Volatility was subdued during Tuesday with low volumes on seasonal grounds dampening activity. Overall risk appetite held steady with measured demand for reflation trades.

US bond yields continued to move higher to a 5-week peak. Low-yield assets were out of favour with net losses for the yen and Swiss franc.  Wall Street equities were little changed with global bourses subdued.

The dollar maintained a firm tone amid Fed on-going tightening expectations. EUR/USD dipped to 4-month lows, but did find support just above 1.1700. After a firm start, Sterling corrected lower later in the day with EUR/GBP just above 17-month lows. Commodity currencies gained an element of support on a recovery in global growth expectations.

The German ZEW investor confidence index declined to 40.3 for August from 63.3 the previous month and below consensus forecasts of 56.7. The current conditions component strengthened to 29.3 from 21.9 previously, although marginally below market expectations. The Euro-zone ZEW index retreated to 42.7 for the month from 61.2 in July. The dip in confidence data maintained underlying reservations over the Euro-zone outlook which also maintained a lack of confidence in the Euro with the single currency unable to regain any territory as market sentiment remained negative.

The July US NFIB small-business confidence index retreated to 99.7 from 102.5 the previous month with an overall dip in confidence. There were further reports of labour shortages with a lack of skilled workers and there was further upward pressure on prices as supply-side issues continued to have an important impact.

There were further expectations that the Federal Reserve will announce plans to taper bond purchases at the September policy meeting.

The dollar maintained a strong tone, although there was a significant shift during the day as the Euro remained vulnerable while commodity currencies were able to regain some ground. EUR/USD dipped to lows near 1.1700 with speculation that any break below this level would trigger further stop-loss selling. The pair did, however, hold above 1.1700 which triggered a marginal recovery amid position adjustment.

Markets will also be looking ahead to the Jackson Hole symposium in the last week of August with Fed Chair Powell due to deliver a keynote speech with strong hints likely over the September decision. The latest CPI inflation data will also be watched closely on Wednesday. Tight ranges prevailed on Wednesday ahead of the inflation data with EUR/USD close to 1.1715 as the dollar maintained a firm underlying tone with a reluctance to engage in aggressive positioning.

US Treasuries lost ground in early New York trading with the 10-year yield moving higher which helped underpin the US dollar while overall equity markets were relatively stable. USD/JPY edged above the 110.50 level with a lack of defensive demand for the Japanese currency.

From a longer-term perspective, there was further speculation over Fed leadership with Chair Powell’s current term due to finish in February 2021. There was also speculation that elements of the US Administration will push for Brainard as Chair which would be seen as a relatively dovish appointment.

Chicago Fed President Evans stated that he would like to see a few more jobs reports before a taper decision, maintaining a more dovish stance than other recent Fed speakers, although there was little impact on market pricing with the 10-year yield at 5-week highs.

The dollar continued to edge higher later in the day as the Senate approved the bipartisan infrastructure spending bill which boosted growth confidence. Narrow ranges prevailed in Asia with equity markets little changed and USD/JPY consolidated around 110.65 with EUR/JPY around 129.70 as the Chinese yuan remained weak.

There were no significant UK data releases on Tuesday with low trading volumes also tending to dampen price action. Markets were continuing to monitor coronavirus developments with no significant change in the narrative at this stage as levels of serious illness remained low, but there were still reservations over the delta variant, especially with high infection rates globally despite high vaccination levels. Overall risk appetite held steady which limited the scope for any Sterling selling and the UK currency also drew underlying support from expectations that the Bank of England was moving towards a hike interest rates.

Sterling was able to hold steady against the US dollar despite underlying US currency gains while EUR/GBP gained to fresh 17-month highs close to 1.1830.

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