Risk appetite dipped sharply at the New York open on Monday with further reservations over global cost and supply-side pressures.

Risk appetite dipped sharply at the New York open on Monday with further reservations over global cost and supply-side pressures. Soaring energy prices continued to drive market sentiment as inflation concerns increased. Wall Street equities posted significant losses despite a limited recovery from intra-day lows.

The dollar was initially unable to gain significant defensive support, but posted net gains on Tuesday amid vulnerable risk conditions. EUR/USD was unable to hold gains and dipped back below the 1.1600 level. Sterling secured a further recovery on higher nominal yields, but GBP/USD failed to hold 1.3600. After posting net gains on Monday, commodity currencies retreated as risk appetite dipped. There was a muted Australian dollar response to the Reserve Bank policy statement.

The Euro-zone Sentix investor confidence index retreated to 16.9 for October from 19.6 previously and below market expectations of 18.5. The data reinforced concerns that higher energy costs could undermine the economic outlook. The European Commission will meet next week to discuss energy crisis measures.

ECB vice-president de Guindos stated that the Delta variant had not had the expected impact and expects strong growth for the third quarter, but he did warn that the expansion has lost some strength due to supply constraints and higher energy costs. He added that the central bank will decide on PEPP alternatives in December if needed. Markets will continue to monitor central bank rhetoric given further upward pressure on inflation in the short term.

The dollar was unable to make any headway ahead of the New York open, especially with gains in commodity currencies limiting potential US support.

US factory orders increased 1.2% for August after a 0.7% gain the previous month with little impact ahead of Friday’s key US jobs data.

Wall Street equities dipped sharply after the New York open, but the dollar was unable to secure defensive demand and the Euro posted net gains. Any sustained under-performance in US equity markets could be a significant element undermining support for the US currency. Developments surrounding energy prices will continue to be watched closely with a particular focus on the relative impact on US, European and Asian economies.

EUR/USD strengthened to highs at 1.1640, but there was a correction around the European close as rapid losses in US stocks did trigger an element of US support.

The dollar secured a further net recovery on Tuesday with EUR/USD trading back just below 1.1600 as the US currency advanced against commodity currencies.

New Japanese Prime Minister Kishida stated that he will swiftly compile an economic support package. The yen overall lost ground into the New York open with risk conditions attempting to hold firm with USD/JPY trading above 111.00 while EUR/JPY traded to highs around 129.40.

US Treasuries edged lower after the Wall Street open, but there was a sharp slide in US equities which pushed the US dollar lower, although there was USD/JPY support near 110.80. Markets continued to monitor US fiscal developments with further meetings between White House and congressional officials to secure an increased debt limit.

Final Japanese PMI services data remained in contraction for September, although overall confidence strengthened to 3-month highs with a stronger increase in employment. Chinese markets remained closed for a holiday which dampened activity, but Asian equities overall retreated which undermined risk appetite. The yen held a firm overall tone, but USD/JPY was able to secure net gains to 111.20 amid wider gains with EUR/JPY just below 129.0.

Sterling was able to post net gains into the New York open with further considerations that the sell-off last week had been over-done. There were also expectations that higher inflation would force the Bank of England to raise interest rates and higher nominal yields helped underpin the UK currency despite very negative real rates.

UK Brexit Minister Frost stated that everything needed to be tried before triggering Article 16 and pulling out of the Northern Ireland protocol with market concerns kept in the background for now. Sterling was broadly resilient after the New York open despite a sharp retreat in US equities.

There was paring of gains around the European close as equity markets moved sharply lower. Sterling was unable to regain traction on Tuesday and GBP/USD traded just below 1.3600 with global risk conditions continuing to dominate market developments. Domestically, markets will continue to monitor developments surrounding energy prices.

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