The dollar performance was mixed with a net advance against commodity currencies.

Inflation expectations and central bank responses have remained key market elements. US Treasuries posted gains during Tuesday with the US 10-year yield at 6-week lows.

Wall Street stocks were unable to make further headway with caution ahead of the US CPI data. Risk conditions were more cautious in Asia, although equities pared losses in late trading.

The dollar performance was mixed with a net advance against commodity currencies. EUR/USD was unable to hold above 1.1600 and drifted lower.

Sterling retreated from intra-day highs as risk conditions turned more cautious. The yen and Swiss franc made net gains on the day.

Commodity currencies overall lost ground with more fragile risk conditions. The Canadian dollar was resilient with net gains amid gains in oil prices.

The German ZEW investor confidence index strengthened to 31.7 for November from 22.3 the previous month and above consensus forecasts of 20.0. The current conditions index, however, dipped to 12.5 from 21.6 and significantly below market expectations. The Euro-zone confidence index strengthened to 25.9 from 21.0 previously.

ECB council member Knot stated that conditions for a rate hike are very unlikely to be met in 2022, although inflationary pressures from higher energy prices and supply bottlenecks are lasting longer than thought initially. He added that policy optionality needed to be a key element once the emergency bond-buying programme is completed. The comments maintained the underlying dovish rhetoric from key ECB figures.

The US NFIB small business confidence index declined to 98.2 for October from 99.1 the previous month. US producer prices increased 0.6% for October with the year-on-year rate unchanged at 8.6% and in line with consensus forecasts. Core prices increased 6.8% over the year and also in line with market expectations.

San Francisco President Daly stated that inflation is all about whether it persists beyond the covid disruptions. She added that it’s too risky to raise rates now given uncertainty how long inflation pressures will last and the best policy is to stay steady and be vigilant.

The dollar recovered some ground against commodity currencies and EUR/USD was unable to hold above the 1.1600 level. The dollar secured a limited net advance ahead of Wednesday’s important CPI data with commodity currencies losing ground and EUR/USD drifting lower to 1.1575.

US Treasuries rallied again in early New York with no significant negative surprises from the producer prices data.  Equity markets also moved lower which provided further net support to the Japanese currency and the US dollar moved lower. US bond yields continued to move lower after the European close with the 10-year yield retreating to 6-week lows near 1.43%. The dollar did demonstrate some resilience and USD/JPY settled around 112.80.

The latest US CPI inflation data will be released on Wednesday which will have a significant impact on inflation expectations and bond markets.

Japan’s Tankan manufacturing index slipped to a 7-month low of 13 from 16 previously with supply issues having a negative impact while the non-manufacturing index edged to a 3-month high. Markets continued to monitor the wider global economic trends.

Chinese consumer prices increased 1.5% in the year to October while producer prices increased 13.5% over the year, the strongest annual rate on record. There were also further concerns over the Chinese property sector with reports that banks were demanding early repayments of loans.

The yen maintained a firm tone, especially with less confident risk conditions and USD/JPY held below the 113.00 level on Wednesday.

Bank of England deputy Governor Broadbent stated that he expects labour-market constraints will ease over time and there was certainly no clear signal that he would back a near-term increase in interest rates which limited potential Sterling support as choppy trading conditions persisted.

The NIESR stated that it expects the Bank of England will increase interest rates to 0.5% by the second quarter of 2022 and then pause until inflation reaches a peak.

Sterling overall lost ground later in the day with a more defensive tone surrounding risk appetite undermining support. Underlying Brexit tensions were also a significant factor eroding potential support. There was a GBP/USD retreat to around 1.3550 while GBP/EUR rallied towards 1.1735 before dipping back to 1.1690.

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