Sterling was hampered by fresh concerns over the impact of energy costs and economic disruption with GBP/USD below 1.3700.

Risk appetite held steady on Friday, although with further net uncertainties over the Evergrande situation. Wall Street equities secured a limited net gain. US bond yields held firm during Friday with the 10-year yield at the highest level since early July. Asian equities were mixed as Chinese central bank liquidity injections supported confidence.

The dollar posted net gains, but retreated from intra-day highs as net defensive demand faded. EUR/USD dipped to test 1.1700 before recovering slightly with little impact from the German election. Sterling was hampered by fresh concerns over the impact of energy costs and economic disruption with GBP/USD below 1.3700. Commodity currencies recover from intra-day lows as risk appetite held steady. There was a notable recovery for the Canadian currency as higher oil prices boosted demand.

The German IFO business confidence index dipped to 98.8 for September from a revised 99.6 previously and marginally below consensus forecasts. The current conditions component retreated to 100.4 from 101.4 and below market expectations. The expectations index edged lower to 97.3 from 97.8, although this was slightly above forecasts. The IFO stated that industry supply shortages had worsened and there were no signs that disruptions would ease in the short term with the crisis expected to continue until at least the end of 2021. In this environment, there were expectations that there would be further upward pressure on costs and prices.

US Kansas City Fed President George stated that the criteria for a tapering of bond purchases has been met. She also commented that some of the inflation changes from the pandemic may persist, maintaining expectations that the Fed would announce a tapering of bond purchases at the November meeting.

The dollar overall secured net gains with backing from higher yields while EUR/USD was unable to make any headway and settled around 1.1720 after testing 1.1700.

CFTC data recorded a sharp decline in long Euro positions to just above 12,000 contracts from near 28,000 with a notable net increase in long dollar positions.

Exit polls indicated a very tight context in the German general election with close to equal support for the CDU/CSU and SPD parties. Provisional results indicated that the SPD won with 25.7% while the CDU/CSU had 24.1% and there will need to be extended efforts to form a coalition which could take months.

The Euro edged higher in early Europe on Monday as defensive dollar demand remained slightly lower, but failed to make significant headway and EUR/USD settled around 1.1715.

There were further uncertainties surrounding the Evergrande situation with a report that US investors had not received the scheduled coupon payment.

US bond yields continued to edge higher after the New York open which helped underpin the US dollar. The yen was unable to make any significant headway and USD/JPY secured net gains to 110.70 into the European close as risk conditions held firm.

CFTC data recorded a net decline in short yen positions to just over 56,000 from just over 60,000 the previous week.

Markets will be monitoring US negotiations surrounding the US debt limit and government shutdown with an October 1st deadline for avoided a government shutdown.

There were reports that all states of emergency in Japan will be removed this week which provided an element of yen support, but yield trends undermined the Japanese currency. The main focus was still on the Chinese Evergrande situation with expectations that another scheduled coupon on dollar debt would be missed and enter a 30-day grace period. The Chinese central bank again added liquidity aggressively which helped underpin risk appetite during the Asian session.

USD/JPY tested 6-week highs just above 110.80, but was unable to extend gains and settled around 110.50 in early Europe with EUR/JPY around 129.60.

The UK CBI retail sales index slowed sharply to 11 for September from 60 the previous month and well below consensus forecasts of 35. Sales were disappointing for the time of the year and stock levels were again reports being too low, but companies are expecting a stronger performance for October.

The data dampened support for the UK currency and there were fresh doubts whether the Bank of England would be able to sustain a hawkish stance over the next few months. Further evidence of supply issues and disruption to the economy from energy shortages also unsettled confidence. GBP/USD dipped back below 1.3700 while GBP/EUR dipped to 1.1660 amid speculation that the central bank would not be in a position to increase interest rates.

CFTC data recorded a fresh switch in positioning with a small net short position from a long position of close to 5,000 the previous week. The data illustrates a notable lack of confidence within hedge funds on underlying direction surrounding the UK currency. Overall sentiment remained fragile on Monday, but solid global risk conditions curbed potential selling pressure with GBP/USD trading around 1.3670 and GBP/EUR around 1.1670.

Economic Calendar

13:30USD Durable Goods Orders (M/M)(AUG-0.30%-0.10%
13:30USD Durable Goods Orders Ex Transportation(AUG)0.50%0.80%
15:30USD Dallas Fed Manufacturing Business Index(SEP)9

*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.