Volatility increased sharply on Friday as markets fretted over renewed coronavirus risks amid concerns over a new variant.

Trading activity was curbed by the US Thanksgiving holiday on Thursday. Volatility increased sharply on Friday as markets fretted over renewed coronavirus risks amid concerns over a new variant.

US bond yields moved sharply lower on risk aversion. US equity futures dipped sharply given concerns over potential earnings trends. Asian markets also posted sharp losses with European markets set to slide at the open.

The dollar retreated slightly on a trade-weighted basis with volatile moves on crosses. EUR/USD traded above 1.1200 with a closing of carry trades funded through the Euro providing net support. GBP/USD dipped to fresh 2021 lows at 1.3300 with the slide in risk appetite undermining UK support.

Commodity currencies were mixed on Thursday, but dipped sharply on Friday with AUD/USD at 3-month lows. Oil prices also came under pressure as fear dominated markets. Precious metals secured net gain with gold out-performing on Friday amid weaker risk appetite and dip in US yields.

German consumer confidence edged lower to -1.6 for November from 1.0 the previous month and slightly below consensus forecasts, maintaining unease over trends.

Minutes from the November ECB policy meeting stated that temporary movements in piece and output in opposite directions should not be called stagflation. There was agreement that inflation would decline in 2022, although there were also remarks that the decline would take longer than expected. There were further comments in the minutes over the need to push back against market expectations of tightening and it emphasised the conditions that needed to be met for a rate hike.

Out-going German Chancellor Merkel expressed further concerns over the impact of increased coronavirus cases and there were further concerns over the Euro-zone outlook. The Dutch government announced that it would take additional action, although with some relief that France decided against introducing further restrictions at this stage. Concerns over a new variant started to have an impact and lessened the direct focus on the Euro-zone outlook.

Overall dollar sentiment held firm amid expectations that the Federal Reserve would tighten monetary policy at a faster pace given strong growth and persistent inflation pressures in the economy. EUR/USD secured a limited recovery to 1.1230 during the European session, but struggled to gain any traction.

Liquidity will remain subdued on Friday with lacklustre trading in US markets. There will, however, be the risk that low volumes will contribute to higher volatility. Markets will also be wary over month-end position adjustment during the day.

There was a sharp increase in coronavirus fears on Friday amid fears over a new variant. These fears curbed potential Euro selling with a closing of carry trades and EUR/USD edged higher to 1.1225 as commodity currencies retreated sharply.

In its latest report, the Japanese government stated that the overall assessment of the economy was unchanged with the economy continuing to show weakness, but severe conditions are gradually easing. Lacklustre trading conditions dominated during Thursday with USD/JPY consolidating just above 115.30 and close to 4-year highs as the yen failed to gain significant support.

Risk appetite, however, dipped sharply during the Asian session on Friday with a notable increase in fears surrounding the new coronavirus variant which has emerged in South Africa. There were concerns that the new variant is more transmissible and could evade current vaccines which would have a potentially substantial impact.

Wall Street futures dipped sharply and there were notable losses across Asian bourses. There was also a sharp decline in US bond yields which had an important impact on currency markets. The yen gained renewed defensive support as fear dominated and the slide in yields also eroded US currency support.

In this environment, USD/JPY dipped sharply to lows just below 114.50 while EUR/JPY retreated to around 128.50.

The UK CBI retail sales index strengthened to 39 for November from 30 the previous month and stronger than consensus forecasts of 32.  Although there was some evidence of seasonal sales being brought forward, retailers were still optimistic over the outlook for December. There was a further increase in inflation pressures with selling prices increasing at the fastest pace since May 1990. The data maintained expectations of a near-term rate increase.

There were still underlying reservations over Brexit stresses with the French fishing sector threatening to take additional action by blocking the channel tunnel and Sterling was little changed.

Bank of England Governor Bailey focuses on communication difficulties and the narrow difference between commentary and guidance with a murky boundary between the two. He did note the risk that inflation expectations become embedded and reiterated that the UK labour market is very tight. The rhetoric suggested that the bank was more likely to raise rates in December, although market conviction was lacking given the November experience and clear divisions within the committee.

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