Sterling was hampered by weaker risk conditions while short covering faded.

San Francisco Fed President Daly stated that work on inflation is nowhere near almost done and that the Fed has a long way to go on the task. She added that the central bank is looking at incoming data to decide if the pace of rate hikes can be downshifted or maintained at the current pace.

Chicago head Evans stated that he is hopeful that the Fed can increase rates by 50 basis points in September and then continue with rate hikes until the beginning of the second quarter of 2023. He expects to see a Fed Funds rate of 3.75-4.00% by the end of 2023.

Cleveland Fed President Mester stated that she hadn’t noticed any evidence that inflation has even begun to level off.

The overall rhetoric from Daly was hawkish and comments from Evans suggested a notably higher peak in rates than expected by markets. Treasuries declined sharply after the Wall Street open with the 10-year yield increasing sharply to above 2.70%.

High bond yields were a crucial element in triggering a notable dollar rebound during Tuesday. The dollar index rebounded strongly from 4-week lows, although it faded from peak levels seen in Asia.

US House of Representatives Speaker Pelosi’s plane landed in Taiwan around the European close and there was some relief that there was no immediate response from Beijing. China, however, announced that there would be military exercises surrounding Taiwan from August 4th which maintained underlying concerns.

There were also further reservations over the possible impact on the Ukraine war if China moves closer to Russia.

China’s Caixin PMI services index strengthened to 55.5 for July from 54.5 previously which provided an element of relief over trends in the domestic economy.

There were no major Euro-Zone developments during Tuesday. Gas prices were little changed and still close to 4-month highs which maintained fears over the outlook. The dollar drew strong support from higher bond yields after the Fed rhetoric. EUR/USD dipped below the 1.0200 level with lows at 1.0150 before a correction to 1.0180.

The yen also retreated sharply as US yields jumped higher with a jump in volatility. USD/JPY strengthened to highs at 133.80 before a retreat to 132.80 and fresh gains to 133.30. The Swiss franc held firm ahead of the latest domestic inflation data. USD/CHF posted net gains to around 0.9550 with EUR/CHF around 0.9730.

Sterling was hampered by weaker risk conditions while short covering faded. GBP/USD dipped to lows below 1.2150 before settling around 1.2170.

The Canadian dollar was resilient as oil prices attempted to rally. USD/CAD settled around 1.2855 on Wednesday. Weaker risk appetite undermined the Australian dollar, especially with Taiwan fears. AUD/USD dipped sharply to lows below 0.6900 before a tentative recovery to 0.6930.

Economic Calendar