Risk conditions were less confident on Tuesday amid unease over the impact of inflation pressures and threat of stagflation.

Trading activity was curbed by a partial US holiday on Monday, but there were choppy conditions across equities and commodities. US bond yields were little changed, and currency markets were generally subdued.

Risk conditions were less confident on Tuesday amid unease over the impact of inflation pressures and threat of stagflation. Wall Street indices retreated in choppy trading and lost further ground on Tuesday. Asian equities lost ground amid fresh reservations surrounding the Chinese property sector.

The dollar resisted losses and USD/JPY posted fresh 34-month highs at 113.50 before a correction. EUR/USD was trapped just above 1.3550 in tight ranges. Sterling retreated from initial highs despite higher yields with concerns overgrowth conditions dragging GBP/USD lower.

The Australian dollar was boosted by short covering with net gains. The Canadian dollar was hit by a correction and a dip in oil prices.

The dollar held firm in early Europe on Monday but was unable to make further headway with EUR/USD resilient as it found support close to 1.1550. Overall currency market moves were subdued as is often the case on the Monday following a US employment report. A partial market holiday in the US also dampened activity to some extent, although there were sharper moves across other asset classes.

ECB council member Knot stated that investors need to be aware of the risks of structurally higher inflation, although he also noted that he still expected that higher inflation will be transitory and there was no major hawkish rhetoric.

Bank chief economist Lane stated that a one-off shift in wages as part of an adjustment to a transitory increase in the price level does not shift the path of underlying inflation. He also warned that it is vitally important to adopt a forceful monetary policy to avoid negative deviations from the inflation target becoming entrenched. He added that the EU is in the early stage of an energy shock and the trigger for monetary policy action isn’t there.

The overall dovish rhetoric limited the potential for Euro support in global markets with expectations that yields would remain notably low.

The dollar overall edged lower later in the session, but EUR/USD was unable to make headway and settled around 1.1560 as narrow ranges prevailed. The US currency was also unable to make further headway on Tuesday with EUR/USD settling around 1.1560 as markets monitored global risk conditions.

There were further reports on Monday that some offshore Evergrande bondholders had not received interest payments with markets still wary over the risk of an escalation in the situation, but there was no evidence of immediate defensive yen support as it continued to lose ground.

US Treasuries overall were little changed on Monday as the US holiday curbed activity and the 10-year yield held above 1.60%.

US equity futures traded lower into the New York open, but then posted significant net gains which further undermined potential yen support. The yen was also undermined by high energy prices given the Japan’s dependence on imports with concerns over the impact on domestic demand. Overall, USD/JPY posted further gains to highs around 113.35 near the European close as the yen lost ground on the major crosses.

Equities lost ground later in the US session amid fears over weaker growth and Asian markets were also on the defensive on Tuesday amid fresh concerns over implications of stresses in the Chinese property sector. USD/JPY edged lower to 113.30 from 34-month highs at 113.50 with EUR/JPY just below 131.00.

Sterling posted gains in early Europe on Monday but failed to sustain the advance despite further expectations that the Bank of England move closer to an increase in interest rates and could take action this year. In this environment, there was a further increase in yields.

Markets were monitoring Brexit developments with Irish Foreign Minister Coveney stating that the EU wanted a deal on the Northern Ireland protocol but also stating that the EU needed concessions and that they were very close to the point where the EU says there can be no further compromises.

Underlying yield spreads continued to underpin the UK currency against the Euro, but Sterling was unable to make further headway amid concerns that higher costs would undermine UK demand. Risk conditions were also less confident given unease over the threat of domestic and global stagflation.

GBP/USD was held below 1.3650 and drifted to lows just below 1.3600 while GBP/EUR stalled shy of 2-month highs near 1.1800.

GBP/USD traded around 1.3600 on Tuesday as a less confident risk tone sapped underlying support while the latest labour-market data had little overall impact.

Economic Calendar

07:00GBP Average Earning Including Bonus(AUG)6.00%6.80%
07:00GBP Claimant Count Change(M/M)(SEP)-58.6K
07:00GBP Unemployment Rate(AUG)4.50%4.60%
10:00German ZEW Survey (Current Situation) (OCT)31.9
10:00German ZEW Survey (Economic Sentiment)(M/M)(OCT)26.5
10:00EUR Euro-Zone ZEW Survey (Economic Sentiment)(OCT)31.1
15:00USD JOLTs Job Openings(AUG)10.934M

*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.