Volatility remained elevated on Wednesday with sharp changes in direction.

Volatility remained elevated on Wednesday with sharp changes in direction and the sharpest intra-day swing in US equities for 12 months. Although there were hopes that damage from the Omicron variant would be contained, uncertainty remained very high and there was a reported case in the US.

Fed Chair Powell maintained a hawkish stance and repeated his concerns over inflation trends.

Wall Street reversed strong gains to post notable losses. US longer-term bond yields moved lower during the day. US futures recovered on Thursday with mixed trends in Asia.

The dollar recovered from intra-day lows with limited net change. EUR/USD failed to match 2-week highs, but held above 1.1300. Sterling retreated from intra-day highs with GBP/USD just below 1.3300. Commodity currencies also retreated sharply from highs as equities dipped sharply.

German retail sales fell 0.3% in October with a 2.9% annual decline. The final Euro-zone manufacturing PMI index edged lower to 57.4 from the flash figure of 57.6.

There were still reservations surrounding the Omicron variant, although Eurogroup head Donohoe was confident that the region’s recovery would be sustained.

Ahead of the New York open there were reports that the ECB would decide against making major decisions at the December policy meeting. Although the PEPP bond buying is still expected to finish in March, the central bank may not be in a position to calibrate medium-term policy given uncertainty over the Omicron variant.

EUR/USD held above 1.1300 and edged higher as the dollar was unable to gain significant traction, but failed to move above Tuesday’s highs.

The US ADP employment report recorded an increase in private-sector payrolls of 534,000 for November from 570,000 the previous month and slightly above consensus forecasts of 525,000. The data suggested a robust labour market but added little to the overall economic debate.

The ISM manufacturing index edged higher to 61.1 for November from 60.8 the previous month and close to consensus forecasts. New orders and production also increased at a slightly faster rate on the month while employment increased at a slightly faster rate. There were still important supply difficulties and a further lending of delivery times, although the rate of deterioration eased slightly. There was also a slight easing of upward pressure on prices during the month.

The dollar posted net gains after the firm data and further comments from Fed Chair Powell over inflation risks also boosted the dollar with EUR/USD retreating to 1.1320.

Volatility eased on Thursday with EUR/USD little changed as commodity currencies stabilised with trends in risk appetite remaining dominant.

US Treasuries dipped early in the European session on Wednesday, but the 10-year yield was unable to hold above the 1.50% level and prices rallied again into the New York open with yields retreating to around 1.48%. The dip in yields sapped US dollar support with a USD/JPY retreat below the 113.00 level as the yen was resilient on the crosses despite a solid advance in global equities.

Fed Chair Powell stated that demand in the US economy is very robust as a result of fiscal stimulus and the rapid recovery, and he also stated that the risks of higher inflation had increased. Powell did note that he expected inflation to decline significantly in the second half of next year, but also admitted that there was a high degree of uncertainty. Cleveland Fed President Mester stated that a quicker taper gives the Fed room to hike rates earlier if needed.

Equites gradually lost traction and dipped sharply late in the New York session which also dragged the dollar lower. Volatility remained high with a tentative recovery in US futures on Thursday following relatively optimistic comments from US Chief Medical advisor Fauci and USD/JPY traded above the 113.00 level despite lower yields.

Nationwide reported a 0.9% increase in UK house prices for November with the annual increase at 10.0% from 9.9% previously. The UK manufacturing PMI index was revised marginally lower to 58.1 from the flash reading of 58.2 as supply-side issues remained a key element.

Sterling gained an element of support from stronger global risk conditions, although there was little evidence of momentum with underlying caution still a key element. Markets remained uneasy over developments surrounding the Omicron variant, especially given the importance of the UK as a travel hub.

There were also further doubts whether the Bank of England would push ahead with a near-term interest rate hike given elevated uncertainty.

From highs at 1.3350, GBP/USD retreated to just below 1.3300 as the dollar regained ground while EUR/GBP found support below 0.8500. Sterling was unable to make headway on Thursday and GBP/UD traded below 1.3300 with reports that the US was delaying a trade deal with the UK due to Brexit concerns also hampering sentiment.

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