Bank of England intervenes to buy gilts.
After the European open, the Bank of England announced that it would intervene to buy long-dated gilts in the market to combat disorderly conditions. It would conduct daily operations to buy gilts until October 14th as the market had become dysfunctional and was posing a threat to financial stability. The bank also announced that the scheduled gilt sales as part of the quantitative tightening programme would now be delayed until the end of October.
Gilt yields declined sharply after the Bank of England announcement, although volatility remained extremely high.
Markets also scaled back their expectations of interest rates hitting 6% next year while Sterling managed to post sharp gains on short covering, although it faded quickly from highs.
Atlanta Fed President Bostic stated that his baseline assessment was for a further 75 basis-point rate hike at the November policy meeting with another 50 basis points in December which would take the Fed Funds rate to 4.50%. He added that supply-side improvements had not come as fast as expected.
The Bank of England move to intervene and buy long-dated UK bonds had a significant global impact with US Treasuries also rallying strongly with the 10-year yield sliding to lows near 3.70% from overnight highs at 12-year highs above 4.00% before a rebound to 3.83%.
The dip in yields helped trigger a rebound in risk appetite with gains in equity markets, although underlying sentiment remained very fragile with equities dipping again late in Asia on Thursday.
The decline in bond yields also had a significant impact on the US dollar with the currency correcting sharply lower as markets also responded to over-bought conditions. There was still underlying dollar buying on dips.
There will be further month-end and quarter-end position adjustment on Thursday which will contribute to further very volatile trading conditions during the day.
The Euro was hampered by unease over energy supplies following apparent sabotage attacks on the Nord-Stream pipeline. ECB rhetoric remained hawkish with expectations of a further sharp rate hike in October. German consumer confidence also declined to a fresh record low. After initial strength, the dollar was undermined by a dip in yields.
Euro short covering was also an element in US trading. After fluctuating around 0.9550, the EUR/USD surged to highs near 0.9740 before dipping back below 0.9700.
Lower US yields provided some relief for the yen. USD/JPY dipped to lows below 144.00. Yields stabilised on Thursday with USD/JPY strengthening to 144.50.
The Swiss franc was resilient despite stronger risk appetite. EUR/CHF dipped to fresh 7-year lows below 0.9440 before a recovery. After dipping sharply to 0.9770, USD/CHF settled just below 0.9800.
Sterling was subjected to very choppy trading during the day after the Bank of England move to buy bonds. Stronger risk appetite helped propel a powerful Sterling rebound. GBP/USD strengthened to highs above 1.0900 before a retreat back below 1.0800.
Commodity currencies rallied strongly as risk appetite recovered. New monthly Australian inflation data recorded a 6.8% annual rate from 7.0% previously. AUD/USD moved back above 0.6500 before dipping back below this level to near 0.6450. USD/CAD dipped to lows near 1.3610 before a strong rebound to above 1.3700.
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