US ADP jobs data was stronger than expected which helped soothe markets.

Sharp moves in gas prices had an important impact across asset classes on Wednesday as overall volatility increased. Risk appetite dipped sharply in European trading amid inflation fears. US ADP jobs data was stronger than expected which helped soothe markets to some extent.

Risk conditions recovered strongly amid a retreat in European gas prices on Russian rhetoric with hopes for a US debt-limit deal also underpinning confidence.

The dollar retreated from intra-day highs as risk appetite improved. EUR/USD dipped to 14-month lows around 1.1530 before a limited recovery. Sterling recovered from intra-day lows as risk appetite improved with EUR/GBP testing 0.8500.

Commodity currencies reversed losses as global equities rallied.

German factory orders declined sharply with a 7.7% slide for August after a 3.4% increase previously and much weaker than expected. Although the data is somewhat data it maintained reservations over the Euro-zone outlook. Euro-zone retail sales increased 0.3% on the month with sales unchanged over the year.

The Euro overall came under significant pressure after the European data releases and the dollar also drew fresh support. The dollar maintained a firm tone as equity markets retreated and EUR/USD dipped to new 14-month lows at 1.1530, although the dollar index traded just below 14-month highs.

The ADP data recorded an increase in private-sector payrolls of 568,000 compared with consensus forecasts of 430,000, although the previous data was revised lower to 340,000. The data overall offered some reassurance over underlying labour-market trends ahead of Friday’s jobs data. Stronger data would tend to increase net dollar support on growth grounds, although there was also a net recovery in risk appetite which curbed potential US currency demand on defensive grounds.

There was choppy trading after the New York open with a strong focus on energy prices. After an initial surge, there was a sharp reversal in gas prices which also helped underpin risk conditions and curbed dollar demand, although uncertainty remained high amid very choppy moves surrounding energy prices. EUR/USD was just above 1.1550 in early Europe on Thursday with sentiment undermined by a larger than expected 4.0% decline in German industrial production.

The yen strengthened ahead of the New York open with significant defensive demand as equity markets declined sharply. US Treasuries rallied after the New York open despite the stronger than expected ADP jobs data with bond yields edging lower. In this environment, USD/JPY dipped to the 111.30 area despite a wider advance.

Markets remained focussed on underlying inflation pressures and the potential impact on both global economies and monetary policy.

After the European close there were reports that Senate Republican head McConnell would allow a temporary extension to the debt limit which helped underpin risk appetite. Wall Street equities moved into positive territory and USD/JPY edged higher to 111.50.

Former New York Fed President Dudley expressed concerns over inflation pressures and stated that excess dovishness by the Fed increases the risk of a major policy error and the need to raise rates rapidly if inflation does not decline.

Chinese markets remained closed on Thursday, but will re-open on Friday with the financial-market developments watched closely. Geo-political developments will also be potentially important with President Xi due to make a speech on Taiwan at the weekend. Risk appetite remained firm during the Asian session amid confidence that there would be a deal to raise the debt ceiling and USD/JPY consolidated around 111.40 with caution ahead of Friday’s US jobs report.

The UK PMI construction index declined to an 8-month low of 52.6 for September from 55.2 previously and below consensus forecasts of 54.0. Although there was an element of weakening demand, there were severe supply-side difficulties with a lack of transport and materials as well as on-going staff shortages. There was further strong upward pressure on prices, although the rate of increase in purchase prices eased slightly on the month.

Sterling lost ground in early Europe as equity markets dipped sharply with a break below the 1.3600 level also triggered increased selling pressures. There was GBP/USD support below 1.3550 and Sterling was resilient on the crosses with EUR/GBP continuing to test support below 0.8500.

Overall Sterling/dollar volatilities increased to a 7-month high with markets wary over further choppy moves. France announced that its action plan for access to UK fishing grounds will be announced on October 15th, but there was little overall impact in currency markets. Sterling bounced when risk appetite recovered, although trading conditions remained notably choppy. GBP/USD traded around 1.3580 on Thursday with EUR/GBP just above 0.8500 as overall risk appetite held firm.

Economic Calendar

06:45CHF Unemployment Rate n.s.a.(SEP)2.80%2.70%
06:45CHF Unemployment Rate s.a.(SEP)2.80%2.90%
07:00GBP Halifax HPI (M/M)(SEP)0.80%
07:00German Industrial Production (M/M)(AUG)-0.40%1.30%
09:30ECB Lane speech
13:30USD Initial Jobless Claims
13:30USD Continuing Jobless Claims
13:40FOMC member John C. Williams speech
14:00ECB Lane speech
15:00CAD Ivey PMI(M/M)(SEP)66
16:45ECB Lane speech
20:00USD Consumer Credit(AUG)17.00B

*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.