Volatility eased on Thursday with a partial US holiday curbing activity.

Volatility eased on Thursday with a partial US holiday curbing activity. Inflation concerns were still a major market focus following the stronger than expected US CPI release on Wednesday.

Wall Street equities posted marginal gains amid subdued conditions. Sentiment in Asia held steady with an easing of immediate reservations over the Chinese property sector.

The dollar secured a net advance to fresh 20-month highs on Fed tightening expectations. EUR/USD dipped further to fresh 20-month lows below 1.1450. Sterling remained on the defensive after no inspiration from UK data with GBP/USD at fresh 2021 lows.

Commodity currencies were hurt primarily by a stronger US dollar with significant net losses. Oil prices were subjected to choppy trading with selling on rallies.

The Euro remained on the defensive in early Europe on Thursday with the EUR/USD break below 1.1500 on Wednesday continuing to undermine confidence.

The EU Commission revised its 2021 GDP growth forecasts higher to 5.0% from 4.3% previously with 2022 GDP growth projected at 4.3%. The 2021 CPI inflation forecast was revised higher to 2.4% before slowing to 2.2% next year and 1.4% in 2023.

The overall impact was limited, especially with expectations that the ECB will maintain a very accommodative policy stance over the medium term.

The dollar continued to gain underlying support from Wednesday’s much higher than expected CPI inflation forecast with expectations that the Federal Reserve would have to take a more aggressive monetary stance. There was speculation that the tapering of bond purchases would be accelerated and that there would be an earlier than expected increase in interest rates.

There was also speculation that the Fed and Administration would be happy to see a firm dollar to help cap near-term inflation pressures.

Overall trading rages narrowed with no further major data releases during the day and a partial US holiday. EUR/USD was unable to regain significant ground and settled around 1.1460 amid expectations that yield differentials will undermine the single currency.

The dollar held firm on Friday with the currency index at the highest level since July 2020 while EUR/USD traded close to 15-month lows just below 1.1450.

US Treasury futures were little changed on Thursday with the 10-year yield holding around 1.57%. The partial US holiday curbed activity and USD/JPY was held just below the 114.00 level at the New York open.

Following the much higher than expected inflation data, markets will monitor comments from US Federal Reserve officials closely in the short term. In particular, asset prices will be very sensitive to hints over the potential timetable for an increase in interest rates.

Any Administration hints on whether Powell will be nominated for a second term as Fed Chair will also be monitored closely in the short term ahead of an expected announcement later this month. The dollar would be at risk of selling f Powell is not nominated for a second term.

Asian equity markets were able to make headway on Friday with an easing of immediate concerns surrounding China’s real-estate sector, although there were still important longer-term reservations. Overall, USD/JPY secured a limited net advance to around 114.20 with EUR/JPY edging higher to the 130.70 area.

Sterling lost ground following the raft of UK data releases with further concerns that the underlying recovery was fading, especially as the September GDP data was boost by health-care spending. A faltering recovery would make it more difficult for the Bank of England to justify higher interest rates.

The latest quarterly trade data also recorded a small decline in exports to the EU while imports increased with a trade deficit of close to £18.0bn from £16.1bn the previous quarter. The underlying trade performance will continue unsettled medium-term Sterling confidence, especially with underlying trade tensions also persisting.

GBP/USD dipped to fresh 2021 lows around 1.3365 with GBP/EUR making limited gains. The UK currency did recover some ground during the day with the increase in domestic yields providing an element of protection from further selling.

Markets will remain on alert for comments from Bank of England officials given speculation that there will be a rate increase next month.

GBP/USD settled below 1.3400 with GBP/EUR around 1.1675. Dollar strength continued to dominate on Friday with GBP/USD around 1.3370. Markets will be on alert for comments from Bank of England officials with Haskel due to speak later in the day.

Economic Calendar

07:30CHF PPI (Y/Y)(OCT)4.50%
08:30CHF PPI (M/M)(OCT)0.20%
10:00Euro-Zone Industrial Production (Y/Y)(SEP)5.10%
10:00Euro-Zone Industrial Production (M/M)(SEP)-1.60%
15:00USD JOLTs Job Openings(SEP)10.300M10.439M
16:00USD Michigan Consumer Sentiment(NOV 01)
17:10FOMC member John C. Williams speech

*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.