Risk appetite was fragile during the day amid reservations over a net slowdown in global growth.

There were no significant data releases on Monday with caution ahead of US CPI data. Risk appetite was fragile during the day amid reservations over a net slowdown in global growth. Wall Street equities were mixed in choppy trading with a limited S&P 500 index gain. Chinese equities dipped sharply in late trading.

The dollar was unable to hold intra-day gains and retreated from 2-week highs. EUR/USD recovered to trade just above the 1.1800. Sterling overall held firm on Monday on yield trends with little change after the UK jobs data. Commodity currencies tended to track the dollar and equities with dovish RBA rhetoric undermining the Australian dollar. The Canadian dollar was resilient amid higher oil prices.

ECB council member Schnabel stated that in all likelihood inflation will noticeably decrease as soon as next year. She added that a premature policy tightening in response to a temporary increase in inflation would choke the recovery, but added that the bank would act resolutely and quickly should inflation reach 2% sustainably earlier than expected. The inflation data will be monitored closely in the short term.

The Euro remained on defensive ahead of Monday’s New York open and tended to drift lower. Commodity currencies were able to resist selling pressure, but the dollar strengthened to 2-week highs with EUR/USD retreating to lows around 1.1770.

The dollar was unable to hold its best levels and EUR/USD recovered to trade just above 1.1800 at the European close with a lack of conviction over direction.

In its latest survey, the New York Federal Reserve reported that one-year inflation expectations had increased to 5.2% from 4.9% with three-year expectations at 4.0% from 3.7%, maintaining underlying concerns over inflation pressures.

The latest US CPI inflation data will be watched closely on Tuesday given the potential importance for interest rate expectations. Consensus forecasts are for a headline increase in prices of 0.4% and an underlying increase of 0.3%. Strong data would increase pressure for a Fed tightening while a weaker release would provide relief.

The dollar was unable to regain momentum on Tuesday and EUR/USD traded just above 1.1800 as narrow ranges prevailed.

Equity markets maintained a firm tone into the New York open, although the Japanese currency was resilient with the dollar unable to make significant headway with little net change in bond yields which sapped potential US support and USD/JPY held around 110.0.

There were no comments from Federal Reserve officials with the blackout period in effect ahead of next week’s policy meeting, but there were expectations that the Fed would continue the move towards announcing a tapering of asset purchases this year.

The US Federal budget deficit amounted to $171bn for August, slightly below consensus forecasts of $175bn. Markets continued to focus on the risk of not approving a timely increase in the debt ceiling with the dollar held in narrow ranges.

The latest Japanese quarterly business confidence data recorded an overall recovery to 3.3 from -4.7 previously with manufacturing and services sectors both returning to positive territory. There were further reservations over the Chinese property sector and Evergrande in particular, although equity markets overall held steady. USD/JPY consolidated just above 110.00 in early Europe with EUR/JPY close to 130.00.

Sterling drifted lower in early Europe on Monday, but there was GBP/USD buying interest close to 1.3800 and a successful test of support helped trigger a more constructive tone. There were further expectations of underlying capital flows into UK assets which helped underpin sentiment. There were, however, fears that retail energy prices would continue to increase which would risk downward pressure on consumer spending. Latest inflation data is due on Wednesday with expectations of a jump in the headline rate. Overall money market trends continued to underpin the UK currency with futures seeing a 57% probability of a 15-basis-point hike in February.

The latest UK data recorded a 59,000 decline in the claimant count while the unemployment rate edged lower to 4.6% from 4.7%. Headline average earnings growth edged lower to 8.3% from 8.8%, marginally above expectations. Market reaction was limited with GBP/USD edging lower to 1.3835.

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