BoE rules out emergency rate hike.

The German IFO business confidence index dipped sharply to 84.3 for September from a revised 88.3 the previous month and well below consensus forecasts of 87.0. The current conditions component declined to 94.5 from 97.5 while the expectations component dipped to 75.2 from 80.5 with both figures well below market expectations.

The IFO stated that the economy is facing recession with almost all sectors in the red and difficulties in energy-intensive industries.

Cleveland Fed President Mester stated that further rate hikes will be needed, and a restrictive policy will be needed for some time with the need for pre-emptive action. She did, however, add that the Fed does not set policy in a global vacuum which could lead to a slightly less aggressive stance.

US Treasuries were subjected to fresh selling pressure during Monday with a further sharp increase in yields as the 10-year yield hit fresh 12-year highs near 3.90%.

There was only a marginal retreat to around 3.86% on Tuesday.

The dollar posted fresh 20-year highs on Monday with further support on yield ground with weaker equities also leading to further defensive dollar demand.

There was a limited dollar correction weaker on Tuesday as risk appetite attempted to recover.

Bank of England Governor Bailey stated that the bank was monitoring financial conditions very closely given the sharp re-pricing of assets. The bank also stated that it would make a full assessment at the November policy meeting and will not hesitate to increase interest rates as much as needed.

After a strong correction, Sterling was subjected to renewed selling after the Bank of England ruled out an emergency rate hike.

A recovery in equities, however, provided some relief on Tuesday as volatility remained elevated with GBP/USD around 1.0800.

National Bank member Maechler stated that the bank will do everything to reduce inflation and make sure that inflation does not become entrenched. She did, however, add that the bank could intervene if the franc strengthened too far with the dollar

Overall confidence in the Euro-Zone economy dipped again after the German IFO data. The dollar was boosted by the fresh increase in US bond yields. Risk appetite was again vulnerable which underpinned the US dollar. EUR/USD briefly recovered 1.0700 before a retreat to below 1.0600. The dollar edged lower on Tuesday as risk appetite attempted to stabilise with EUR/USD edging above 0.9650.

Higher US yields continued to undermine the yen. The Bank of Japan again intervened to buy bonds. USD/JPY posted highs at 144.80 before settling around 144.25.

Swiss sight deposits declined by the largest amount for 11 years. The Swiss franc was unable to make further headway despite fragile risk appetite. EUR/CHF held above 0.9500 with USD/CHF just below 0.9900.

There was further very volatile Sterling trading during the day with a major lack of confidence as yields continued to surge. GBP/USD rallied strongly to 1.0900 before being sold again. GBP/USD edged back above 1.0800 on Tuesday as a recovery in equities provided some tentative support.

Commodity currencies were subjected to renewed selling amid dollar strength and further losses in equities. AUD/USD slumped to 2-year lows below 0.6450 before a recovery to 0.6500. USD/CAD surged to above 1.3800 before a sharp retreat to just below 1.3650.

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