Risk appetite strengthened during the day with strong demand for reflation trades.

The decline in US jobless claims to 18-month lows boosted confidence in the jobs market. US Treasuries strengthened despite the data with yields moving lower.

The dollar recovered from intra-day lows, but overall lost ground as potential defensive demand dipped. EUR/USD was able to hold just above the 1.1600 level. Sterling held firm but retreated from intra-day highs after dovish comments from BoE’s Tenreyro and Mann.

Commodity currencies posted gains amid strong equity markets and a weaker US dollar. Scandinavian currencies secured net gains with EUR/SEK dipping to 3-year lows.

ECB President Lagarde stated that the upswing in inflation is largely driven by temporary factors but admitted that price pressures could become more persistent if supply bottlenecks last longer or wages rise more than expected. Council member Rehn stated that medium-term inflation expectations are in line with the ECB strategy.

The Euro held firm into the New York open with a EUR/USD peak around 1.1625 with defensive demand for the US currency undermined by strength in equities.

US initial jobless claims declined to an 18-month low of 293,000 in the latest week from a revised 329,000 previously and below consensus forecasts of 320,000 while continuing claims also declined to 2.59mn from 2.73mn and below market expectations. The data overall continued to underpin confidence in the labour market which helped offset underlying concerns over the impact of higher energy costs.

Producer prices increased 0.5% for September after a 0.7% increase previously with the year-on-year rate strengthening to 8.6% from 8.3% and in line with consensus forecasts. Underlying prices increased 6.8% on the year and slightly below expectations of 7.1%. Overall, there was marginal relief over potential inflation trends.

The dollar gained net support from the jobs data with EUR/USD dipping back below 1.1600 while commodity currencies maintained a strong tone. The strength in reflation trades continued to erode underlying dollar support with EUR/USD edging back above 1.1600 in early Europe on Friday. The latest retail sales data will be released later in the day which is liable to lead to further choppy trading during the New York session.

Chinese Premier Li stated that the country has plenty of tools to deal with economic challenges while ensuring power supply this winter and next spring.

Defensive demand for the yen was undermined by notable strength in equities, but the dollar was hampered by a further rally in Treasuries as the 10-year yield dipped to near 1.50%. There were, therefore, mixed influences on the dollar with USD/JPY consolidation around 113.50 at the European close while the yen lost further ground on crosses amid the surge in equities together with strong demand for reflation trades.

Philadelphia Fed President Harker stated that it would soon be time to start the reduction in bond purchases, but he wouldn’t expect an interest rate increase until late 2022 or 2023 unless the inflation picture changes dramatically. He did, however, also comment that there is upside risks to his inflation forecast.

Asian equity markets edged higher on Friday as Wall Street futures made further headway. The yen overall remained on the defensive and USD/JPY posted a fresh 35-month high above 114.00 late in the Asian session while EUR/JPY strengthened to 3-month highs around 132.50.

Sterling held a firm tone in Europe on Thursday with further support from expectations of an early Bank of England rate hike. GBP/USD advanced to a 3-week peak at 1.3735 with EUR/GBP retreating to 2-month lows near 0.8450.

Bank of England MPC member Tenreyro stated that inflation should be temporary, and she also warned that an interest rate increase to combat one-off price increases would be self-defeating. The comments suggested that Tenreyro would be reluctant to back any short-term move to raise rates unless there was much clearer evidence of a sustained increase in inflation.

Recently appointed MPC member Mann also stated that the central bank can hold-off raising rates due to the increase in market rates.

The evidence of notable splits within the Monetary Policy Committee is likely to remain a significant market focus with rhetoric from key officials watched very closely in the short term. The dovish rhetoric had an impact in curbing potential support for the UK currency.

Sterling retreated from its best levels with a GBP/USD dip back below the 1.3700 level while the Euro secured a marginal recovery. Sterling was, however, also protected by strong risk conditions which 1.1800.

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