Speculation that the Federal Reserve would have to taper bond purchases at a faster rate.

Risk appetite dipped sharply ahead of Friday’s New York open with markets taking fright over European coronavirus developments. There was speculation that the Federal Reserve would have to taper bond purchases at a faster rate.

Global bourses declined sharply, although sentiment stabilised later in the US session. US bond yields dipped sharply on risk elements before recovering from intra-day lows.

The Euro came under sustained pressure with EUR/USD lows at fresh 16-month lows at 1.1250 before a slight recovery. The dollar posted notable gains on the day with fresh 16-month highs with an element of defensive demand. The Swiss franc strengthened sharply with EUR/CHF below 1.0500. Sterling was able to post net gains on expectations over a Bank of England rate hike.

Commodity currencies were hurt by US dollar gains, although sentiment held relatively firm. Oil prices declined sharply amid concerns that European coronavirus restrictions will undermine demand.

The Euro dipped sharply in early Europe trading on Friday. Austria announced that there would be a full lockdown in the country to combat the sharp increase in coronavirus cases. The situation in Germany also caused significant alarm with the threat of further restrictions. Fears over the Euro-zone outlook undermined the currency and the dollar secured net gains on defensive grounds. The sharp Swiss franc gains against the single currency also undermined the wider Euro performance.

ECB President Lagarde reiterated that the conditions for an increase in interest rates were unlikely to be met in 2022 and that it does not make sense to tighten monetary policy when inflation pressures are expected to fade. EUR/USD dipped to 16-month lows at 1.1250 before securing a tentative recovery.

Fed Governor Waller stated that inflation pressures are becoming more widespread and will last longer in 2022 than expected. He is also concerned that inflation will get embedded into wage demands. He added that he favoured a faster pace of tapering and a more rapid increase in interest rates. The overall tone from Waller was significantly more hawkish than previously and vice-chair Clarida also commented that a faster pace of tightening might be necessary.

The dollar was unable to capitalise on the more hawkish rhetoric and EUR/USD recovered to trade back above the 1.1300 level at the European close.

CFTC data recorded a fresh switch back to a short Euro position which could limit the potential for further near-term selling.

The dollar overall held firm on Monday and close to 16-month highs with coronavirus trends continuing to undermine Euro support with EUR/USD near 1.1270.

US Treasuries rallied sharply as risk appetite dipped on Friday with the 10-year yield sliding to around 1.50%. Lower yields undermined the dollar and the yen also gained strong defensive support, especially given the extent of short positions. In this environment, USD/JPY retreated to lows at 113.80.

CFTC data recorded a significant reduction in short yen contracts to below 100,000 contracts, although there is still the potential for further short covering.

Markets will remain on alert for a US Administration announcement over who the Federal Reserve chair nomination with Biden expected to announce before the Thanksgiving Holiday whether Powell will get a second term or whether Brainard will be nominated instead.

Market conditions were relatively calm on Monday with Asian equities able to make limited net headway while US yields drifted lower amid hopes that supply-side pressures will start to ease. USD/JPY found some support below the 114.00 level and consolidated around 114.15 in early Europe with EUR/JPY around 128.70.

Sterling dipped sharply after Friday’s European open with the currency undermined by the slide in risk appetite and sharp dollar gains.

Bank of England chief economist Pill stated that some patience will be required before inflation returns to 2%. He added that he did not know how he will vote in December. Pill added that that the first-rate increase would not necessarily be 15 basis points and that the burden of proof on the back of recent data is on those not wanting to raise rates.

UK Brexit Minister Frost stated that significant gaps remain across most issues. EU Commission vice president Sefcovic stated that the recent change in tone must lead to tangible solutions. GBP/USD rallied to above 1.3450 at the European close as rate speculation continued while GBP/EUR held around 1.1920.

CFTC data recorded a further sharp increase in short Sterling positions in the latest week to over 30,000 contracts from 12,000 previously and the largest short position since June 2020. The positioning will increase the scope for a position squeeze if the currency strengthens.

In comments over the weekend, Bank of England Governor Bailey fuelled underlying uncertainty with comments that there is a two-sided debate over inflation.

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