BoE’s Bailey says no extension to gilt purchases.

In comments after Tuesday’s European close, Bank of England (BoE) Governor Bailey insisted that pension funds needed to rebalance their holdings by the end of this week as he looked to resist pressure to extend the emergency bond-buying programme. In response, Gilts came under renewed and sharp selling pressure and Sterling dipped sharply.

There was also a wider dip in risk conditions after Bailey’s comments.

In Asian trading on Wednesday, there were hints of a U-turn from Bailey which stabilised confidence to some extent, but markets are braced for further high volatility.

The latest New York survey recorded a decline in 1-year inflation expectations to a 12-month low of 5.4% from 5.7% previously, although the 3-year expectations edged higher to 2.9% from 2.8%.

Cleveland Fed President Mester stated that monetary policy needs to be moved to restrictive levels and there has been no progress in cutting inflation.

She added that the biggest risk is that the Fed does not hike rates enough and she is not expecting rates to be lowered in 2023.

US bond yields declined on Tuesday which provided an element of relief for markets. The 10-year yield declined to lows below 3.90% before edging higher again.

Wall Street rallied at times, but failed to hold gains and closed with net losses.

US Treasury Secretary Yellen stated that the dollar’s level is the logical outcome of policy, dampening expectations that there would be any efforts to restrain the US currency.

Japanese Cabinet Secretary Matsuno stated that appropriate steps will be taken on excessive FX moves, but the yen came under further pressure with USD/JPY strengthening beyond the previous intervention level to trade at 24-year highs near 146.40.

Chinese new loans increased sharply by CNY2470bn for September from CNY1250bn the previous month and well above consensus forecasts of CNY1800bn while overall social financing increased CNY3530bn from CNY2430bn previously. The strong increase in credit provided limited reassurance over the near-term growth outlook.

The latest data recorded a 0.3% decline in UK GDP for August as industrial production dipped sharply on the month.

There were no major Euro-Zone developments during Tuesday. The Euro continued to demonstrate some resilience. The dollar was hampered by a decline in yields. A recovery in equities also limited defensive dollar demand.

EUR/USD found support just above 0.9670 and rallied to highs around 0.9770. EUR/USD failed to hold gains and dipped back to 0.9700 as equities dipped again.

USD/JPY was held in tight ranges and settled around 145.80 on Tuesday. Reduced speculation over intervention triggered USD/JPY gains to 24-year highs near 146.40 before a marginal correction.

The Swiss franc was firm despite stronger risk appetite with volatility underpinning franc demand. EUR/CHF edged below 0.9700 with USD/CHF dipping to 0.9930 before a rebound to 0.9970.

Sterling initially remained under pressure with fears over UK fundamentals. A recovery in risk appetite provided support and triggered a round of short covering. GBP/USD found support at 1.1000 and rallied to highs above 1.1150. Bailey’s comments and slide in gilts triggered another sharp sell-off with GBP/USD diving below 1.1000 and 10-day lows of 1.0925.

Commodity currencies rallied as risk appetite improved and the US dollar retreated, but volatility remained high with another round of selling into the New York close. AUD/USD moved back above 0.6300 before retreating again with net losses to 0.6260 on Wednesday. USD/CAD retreated sharply to lows below 1.3720 before a fresh surge to 1.3800 and it traded just above this level on Wednesday.

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