Lagarde backs further ECB rate hikes.
Chinese developments have been a key ingredient for confidence in the global economy and overall risk conditions.
Confidence dipped during Monday as the Chinese authorities looked to crack-down on protests in Shanghai. There was, however, a recovery in Asia following rumours that there would be a Chinese reversal of the zero-covid policy.
Risk appetite attempted to recover in Europe on Monday, but there was a renewed lack of confidence after the New York open with markets fretting over global recession risks.
There was a fresh recovery in risk assets in Asia on Tuesday amid hopes that China would change policy with further choppy trading likely during the day.
New York Fed President Williams expressed some confidence that there were signs of moderating inflation and supply-chain improvements.
He added, however, that inflation risks are still on the upside and also expected that rates would not be cut until 2024.
In testimony on Monday, ECB President Lagarde stated that rates are still in an accommodative range and that there is still upward pressure on inflation. In this context, she added that rate hikes still have a long way to go.
She added that incoming data suggests upward pressure on wages and the bank will continue to assess the policy implications.
There was volatile trading on Monday with month-end positioning having a significant impact and the dollar gaining support from corporate dollar buying.
There will be further choppy trading on Tuesday as position adjustment continues.
Oil prices were initially under pressure on Monday before recovering strongly amid fresh rumours that OPEC would cut output levels in response to the recent slide in prices.
The Euro posted strong gains after Monday’s European open with higher German yields providing net support. EUR/USD posted 5-month highs close to 1.0500 before stalling. The Euro reversed course as risk appetite deteriorated. The dollar also gained net support from month-end corporate dollar buying. Overall, the US currency recovered strongly after the US open.
EUR/USD posted sharp losses to lows below 1.0350. There was a fresh EUR/USD recovery on Tuesday to 1.0370 as risk conditions dominated.
Higher US yields provided an element of dollar support against the yen. USD/JPY recovered from sharp losses with net gains to near 139.00. USD/JPY retreated to around 138.50 on Tuesday with the yen resilient.
The Swiss franc recovered from initial losses to post net gains. EUR/CHF posted highs at 0.9890 before a sharp decline to 0.9815 before stabilising. USD/CHF posted net gains to near 0.9500 before a retreat to 0.9460.
Sterling was undermined by weaker risk conditions with little in the way of domestic developments. GBP/USD dipped below 1.2000 with lows at 1.1950 before a recovery to 1.2000 on Tuesday.
Commodity currencies came under pressure amid the slide in equities and US dollar gains. There was a recovery in Asia on Tuesday amid China hopes. AUD/USD dipped to lows below 0.6650 before a recovery to above 0.6700. USD/CAD posted gains to near 1.3500 before a retreat to 1.3430.