Risk appetite also deteriorated sharply during the day amid global inflation concerns.

US bond yields moved higher again on Tuesday amid inflation fears with the 10-year yield around 12-week highs near 1.55%. Risk appetite also deteriorated sharply during the day amid global inflation concerns.

Wall Street equities retreated sharply amid earnings reservations and higher yields. Global equity markets also posted sharp losses as the surge in energy prices undermined overall confidence.

The dollar gained on yield and defensive grounds to post 10-month highs with an element of month-end demand also significant. EUR/USD retreated to 1.1670 before attempting to stabilise. Sterling dipped sharply amid risk aversion and fears over the impact of energy difficulties with GBP/USD sliding to 8-month lows below 1.3550. Commodity currencies also retreated sharply and weaker risk conditions and dollar gains.

German consumer confidence edged higher to 0.3 for September from -1.1 the previous month and above consensus forecasts of -1.6 with little Euro impact.

The dollar posted net gains into Tuesday’s New York open with the US currency gaining support on yield grounds as well as an element of defensive demand as risk appetite deteriorated and equity markets came under pressure. EUR/USD was also unable to gain support and there was a more decisive break below the 1.1700 level as the lack of yield continued to erode support with a retreat to near 1.1675 at the US open.

The Case Shiller house-price index increased 1.5% for July after a 1.8% increase the previous month with the year-on-year increase at 19.9% from 19.1% previously and marginally below consensus forecasts.

Consumer confidence retreated further to a 5-month low of 109.2 in September from 115.2 in August and below market expectations. The current conditions index dipped to 143.4 from 148.9 while the expectations component retreated to 86.6 from 92.8 which triggered fresh reservations over the consumer spending outlook.

The Richmond Fed manufacturing index retreated sharply to -3 for September from 9 in August and well below market expectations of 12 with a sharp decline in new orders on the month. Labour market indicators eased slightly on the month, but cost pressures remained intense with input prices increasing at a record pace.

St Louis Fed President Bullard stated that policy normalisation could take place quicker than in 2007-2009 and he expected two interest rate increases in 2022.

Chair Powell reiterated that the test for tapering bond purchases had all but been met. The dollar maintained a robust tone and strengthened to 10-month highs as commodity currencies retreated sharply and there was also an element of month-end US demand. EUR/USD dipped to lows around 1.1670 before rallying slightly to 1.1680 with the dollar holding a firm tone on Wednesday as US yields continued to underpin the US currency.

The US goods trade deficit widened slightly to $87.6bn for August from $86.8bn the previous month and close to market expectations. There was a small increase in exports for the month and a slightly larger increase in imports for the month. The trade deficit could return as a medium-term negative factor for the dollar.

US yields continued to edge higher ahead of Tuesday’s New York open which underpinned the US dollar and offset the impact of weaker equities with USD/JPY around 111.50. The US currency secured net gains while EUR/JPY was able to hold just above the 130.00 level.

Treasury Secretary Yellen stated that the US was likely to hit the debt ceiling by October 18th which helped concentrate the market focus on the debt issued and threat of government shutdown. The further erosion in equity prices curbed the potential for further yen selling as risk appetite deteriorated.

There were assumptions that the latest Evergrande coupon payment would be missed and enter the 30-day grace period, but with no official news out of China.

The S&P 500 index declined 2.0% and markets were generally on the defensive on Wednesday with USD/JPY stabilising close to 111.50 and EUR/JPY above 130.0.

Sterling was unable to make headway in early Europe on Tuesday and losses gradually accelerated during the session. The UK currency was hurt by the weaker tone surrounding risk appetite and was also undermined by increased reservations over the domestic outlook amid the surge in energy costs and supply difficulties.

New Bank of England MPC member Mann stated that the further increase in market inflation expectations to an 8-year high is not troubling which triggered renewed speculation that she would take a dovish stance on the committee. There were further concerns surrounding the impact of energy costs.

The comments further eroded UK currency support with a GBP/USD break of technical support between 1.3570 and 1.3600 further eroding confidence. Overall, GBP/USD slumped to 8-month lows around 1.3525 while GBP/EUR dipped sharply to 1.1580. There was some stability on Wednesday, but confidence remained fragile amid further concerns that soaring energy costs and disruption would damage the economy.

Economic Calendar

09:00CHF ZEW Expectations(SEP)-7.8
09:30GBP Consumer Credit(SEP)-0.042B
09:30GBP Mortgage Approvals(SEP)78.60K75.15K
10:00Euro-Zone Consumer Confidence(SEP)-5.3-5.3
12:00USD MBA Mortgage Applications4.90%
13:00ECB Luis De Guindos Speaks
13:30CAD RMPI (M/M)(AUG)2.20%
15:00USD Pending Home Sales (M/M)(AUG)0.40%-1.80%
15:00USD Pending Home Sales (Y/Y)(AUG, 2020)110.70%
15:30ECB Lane speech
16:45USD FOMC Member Powell Speech
16:45European Central Bank President Lagarde Speaks
17:30European Central Bank President Lagarde Speaks
19:00FOMC Member Raphael Bostic speech
22:00FOMC member John C. Williams speech
22:45NZD Building Permits (M/M)(AUG)2.10%

*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.