The dollar index posted fresh 12-month highs on expectations of higher yields.

Markets continued to focus on the extent of global inflation pressures and supply-side issues during Tuesday. US bond yields edged lower on the day despite inflation concerns.

Risk appetite was still slightly more cautious amid global stagflation fears. Wall Street equities drifted lower as chip shortages dampened confidence in the tech sector. Global equity markets overall edged lower, although Chinese markets traded slightly higher.

The dollar index posted fresh 12-month highs on expectations of higher yields, but faded slightly ahead of the US CPI data. EUR/USD dipped to 14-month lows around 1.1520 before a tentative recovery to 1.1550. Sterling was mixed with support from higher yields offset by reservations over the recovery outlook.

The Australian dollar was unable to sustain gains as Chinese reservations persisted. USD/CAD dipped to 10-week lows on firm Canadian sentiment before a slight recovery.

The German ZEW investor confidence index declined to 22.3 for October from 26.5 previously and slightly below consensus forecasts of 24.0 while the current conditions index retreated more sharply to 21.6 from 31.9 previously with notable supply-side issues. The Euro-zone ZEW index dipped to 21.0 from 31.1 previously.

ECB council member Villeroy stated that the risk remains that we will fall short of the 2023 inflation target rather than exceed it. He added that exiting the PEPP bond-buying programme would not signal the end of an accommodative policy. The Euro was unable to make any headway in early Europe and dipped around the US open.

US JOLTS jobs-opening data recorded a decline to 10.44mn from a revised record high of 11.1mn the previous month and below market expectations of 10.90mn. There was also a slowdown in new hires, but the quit rate increased sharply which indicated a tight labour market and fuelled expectations of higher wages.

Atlanta Fed President Bostic stated that he would be comfortable with beginning a tapering of bond purchases in November. He added that underlying inflation is above the committee’s 2% objective. St Louis head Bullard also backed a November move to start tapering, but wanted the process to be completed in the first quarter of 2022.

Fed vice-chair Clarida repeated the standard line that a gradual taper concluding in mid-2022 may soon be warranted. He added that inflation was running well above the moderate overshoot of the 2% goal and that inflation risks were to the upside. Overall, the bar for a taper on inflation grounds had been more than met while the employment target is all but met.

Although the dollar struggled to make headway against commodity currencies, the underlying tone was firm with 12-month highs and EUR/USD retreated to 14-month lows near 1.1520. EUR/USD edged higher on Wednesday with a return to the 1.1550 level ahead of the US inflation data later in the day.

Wall Street equities were little changed overall in choppy early trading while US bond yields moved lower. The yen, however, came under sustained pressure in early New York and USD/JPY surged to fresh 34-month highs near 113.80.

Treasury Secretary Yellen reiterated that she expects the higher inflation rate will be transitory, although with caveats that the pressures would not disappear on a 1-2 month view. The latest US CPI inflation data will be watched closely on Wednesday for further evidence on underlying inflation pressures.

Japan’s Tankan manufacturing index declined to dipped to a 6-month low of 6 for October from 18 previously while there was a marginal improvement in the services index to -1 from -2. Core machinery orders declined 2.4% for August compared with expectations of a 1.7% increase.

Chinese trade data recorded a stronger than expected increase in exports, although the import data was weaker than expected, maintaining some reservations over internal demand. There were expectations that Japan would favour a weaker yen and USD/JPY held around 113.50 on Wednesday as equities drifted lower.

Sterling was unable to make headway after the UK employment data with markets still wary over an increase in energy costs. There was, however, still underlying support from higher US bond yields amid further speculation that the Bank of England would push ahead with an early increase in interest rates.

UK Brexit Minister Frost stated that we are now facing a serious situation on the Northern Ireland protocol and that it will be impossible to move further without significant change. He also commented that he was concerned that the EU ideas will not be enough to do the job first time round. Markets were monitoring the Brexit developments, although the overall impact was limited with the EU set to announce on Wednesday its proposals for easing friction.

Overall risk conditions were little changed during the day, although there were further reservations over underlying inflation trends.

Economic Calendar

Expected Previous
07:00 GBP Industrial Production (Y/Y)(SEP) 3.10% 3.80%
07:00 GBP Industrial Production (M/M)(SEP) 0.20% 1.20%
07:00 GBP Manufacturing Production (M/M)(AUG) 0.10% 0.20%
07:00 GBP Manufacturing Production (Y/Y)(AUG) 4.10% 6.00%
07:00 GBP Trade Balance(SEP) -12.00B -12.71B
07:00 GBP Trade Balance Non EU(SEP) -6.99B
07:00 Germany CPI (M/M)(SEP) 0.00% 0.00%
07:00 Germany CPI (Y/Y)(SEP) 4.10% 4.10%
07:00 Germany Harmonised CPI (M/M)(SEP) 0.30% 0.30%
07:00 Germany Harmonised CPI (Y/Y)(SEP) 4.10% 4.10%
10:00 Euro-Zone Industrial Production (Y/Y)(AUG) 6.30% 7.70%
10:00 Euro-Zone Industrial Production (M/M)(AUG) 1.50%
12:00 Monthly Oil Market Report
13:30 USD CPI (Y/Y)(SEP) 5.30%
13:30 USD CPI (M/M)(SEP) 0.30%
13:30 USD CPI Ex Food & Energy (Y/Y)(SEP) 4.00%
13:30 USD CPI Ex Food & Energy (M/M)(SEP) 0.10%
15:30 MPC Member Cunliffe Speaks
19:00 USD Fed FOMC Minutes

*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.