Risk appetite dipped in US trading on Friday amid reservations over the global growth outlook.

US PPI data was slightly above consensus forecasts which maintained a focus on inflation trends with the key CPI data on Tuesday. US bond yields edged higher, although ranges were contained.

Risk appetite dipped in US trading on Friday amid reservations over the global growth outlook. Wall Street posted further net losses with a fifth successive retreat for major indices. Futures edged higher on Monday with Asian bourses advancing in late trading.

The dollar secured an element of fresh defensive support as risk appetite faltered. EUR/USD retreated and dipped below the 1.1800 level on Monday. Sterling failed to hold Friday’s intra-day highs amid reservations over the recovery outlook. Commodity currencies retreated as risk appetite dipped before regaining some ground on Monday.

ECB council member Holzmann stated that PEPP bond purchases should end next year if economic conditions remain favourable. The overall impact was limited as it added little to the rhetoric from Thursday’s policy meeting. Narrow ranges prevailed ahead of the New York as markets looked for fresh incentives.

US producer prices increased 0.7% for August, slightly above consensus forecasts of 0.6% with a year-on-year increase of 8.3% from 7.8% previously. Core prices increased 0.6% on the month with an annual increase of 6.7% from 6.2% previously. The maintained underlying concerns over inflationary pressures, although the overall market impact was limited ahead of Tuesday’s CPI inflation report.

Cleveland Fed President Mester stated that both sides of the substantial progress test have been met and that she would prefer to begin the tapering process this year. The rhetoric had little overall impact with equity markets having a significant impact. The dollar gained fresh support later in the day as risk appetite dipped towards the European close. Commodity currencies moved lower and EUR/USD retreated to near 1.1810.

CFTC data recorded a re-building of long Euro positions to over 26,000 contracts in the latest week from around 10,500 previously.

Over the weekend, Philadelphia Fed President Harker stated that the tapering of asset purchases should start as soon as possible and hopefully this year. There should be no further commentary on monetary policy this week with the blackout period in operation ahead of next week’s policy statement.

The dollar maintained a firm tone on Monday with EUR/USD dipping below the 1.1800 level as commodity currencies also failed to regain ground.

Chinese new loans increased CNY1220bn for August from CNY1080bn previously, but slightly below consensus forecasts. There was, however, a stronger increase in total social financing of CNY2960bn from CNY1060bn previously and above market expectations. M3 money supply growth slowed to 8.2% from 8.3% previously.

There were reports that the Bank of Japan will warn of mounting risks to exports and output from supply bottlenecks.

Risk appetite held steady ahead of the New York open, but then dipped following reports that the US could pursue a trade investigation against China. After a firm opening, Wall Street equities moved significantly lower which helped underpin the Japanese currency. US bond yields edged higher with the 10-year rate around 1.34%, but USD/JPY was held below the 110.00 level as both currencies secured an element of defensive demand.

CFTC data recorded a small decline in short yen positions to 62,300 contracts from 63,100 previously, but this still indicates scope for notable position adjustment and yen buying if there is a slide in risk appetite and sustained pressure on equity markets. The yen was unable to make headway during the Asian session.

The dollar edged higher on Monday and USD/JPY traded just above the 110.00 level while EUR/JPY retreated to around 129.80 with risk conditions still relatively fragile.

Sterling edged lower following the weaker than expected GDP data, but the currency was resilient and regained ground ahead of the New York open. Overall yield trends continued to provide an element of support for the UK currency, especially with expectations that the Federal Reserve and ECB would maintain accommodative policies. GBP/USD pushed to a high near 1.3890, but then faded later in the day as risk appetite turned less favourable. GBP/EUR also rallied to fresh 3-week highs near 1.1735.

CFTC data recorded a renewed increase in short Sterling positions to 24,500 contracts in the latest week from just below 15,000 previously and the largest short position since the end of July 2020 which suggested that global confidence in the UK currency remained fragile.

Economic Calendar

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12:00 OPEC Meeting
19:00 Monthly Budget Statement(AUG) -307.0B -302.0B

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