Central bank expectations tended to dominate on Monday with no major data releases.

Central bank expectations tended to dominate on Monday with no major data releases. Risk appetite held steady with markets monitoring inflation trends closely. US Treasuries and bond yields were little changed during the day.

Wall Street equities posted net gains with the S&P 500 index at a fresh record high amid a Tesla surge.  Asian equity markets overall struggled to make headway with a retreat in China. The dollar posted net gains on expectations that the Federal Reserve would confirm a tapering of bond purchases next week.

EUR/USD dipped below 1.1600 on dovish ECB expectations before settling close to this level. Sterling was resilient with firm risk conditions and GBP/EUR posted net gains.

Commodity currencies were mixed with solid AUD buying on dips as risk conditions and domestic expectations provided support.

The German IFO business confidence index retreated to 97.7 for October from a revised 98.9 previously and marginally below consensus forecasts of 97.9. The current conditions component edged lower, but was above market expectations while the expectations index retreated more sharply to 95.4 from 97.4 in September.

The IFO institute stated that the German economy is facing an uncomfortable autumn with virulent difficulties in the industrial sector while supply-chain issues are having a negative impact on stores. The Bundesbank stated that economic growth will slow significantly in the fourth quarter of 2021 with supply chain difficulties continuing in the industrial sector while services momentum will also slow. There will also be further upward pressure on costs and prices amid supply issues.

ECB council member Cos stated that recent developments may see a significant downward revision to the economic outlook He also stated that relatively high inflation is likely to be seen in the coming months. The latest council meeting will be held on Thursday.

Weaker than expected German data and expectations that the ECB would maintain accommodative policy undermined the Euro with sharp losses into the US open. The dollar gained support from expectations that the Federal Reserve would push ahead with bond tapering at the November meeting, but defensive demand was weaker. EUR/USD dipped to lows at 1.1590 before a slight recovery. Narrow ranges prevailed on Tuesday with strength in commodity currencies and EUR/USD near 1.1600.

The dollar overall edged higher into Monday’s New York open, although overall moves were limited with a lack of fresh incentives. The Chicago Fed national activity index dipped to -0.13 from a revised 0.05 previously compared with the original release of 0.29. The Dallas Fed manufacturing index strengthened to 14.6 for October from 4.6 previously with markets focussed to an important extent on pricing pressures and global inflation pressures.

US Treasuries were mixed during the day with USD/JPY edging higher to 113.70 as markets engaged in a fresh round of reflation trades. There were further gains for US equities with the S&P 500 index posting a fresh record high while the tech sector posted strong gains which helped underpin the US currency.

There were no comments from Federal Reserve officials with the blackout period now in operation ahead of next week’s policy decision.

Chinese officials pledged further measures to alleviate power shortages, but there were further concerns that supply issues would undermine activity, especially in the car sector. There were expectations that the Bank of Japan would maintain a dovish stance at this week’s policy meeting. US Treasury futures edged lower in Asia with USD/JPY advancing to near 114.00 while EUR/JPY held above 132.00.

Sterling drifted lower into Monday’s New York open with sellers encouraged by the GBP/USD failure to break above 1.3800.

Bank of England Monetary Policy Committee member Tenreyro stated that there is little the bank can do to affect some short-term inflation drivers with inflation likely to increase further in the over the next few months. She added that domestic cost pressures will depend on evolution in the labour market now that the furlough scheme has ended. She also noted that higher inflation may feed through into higher wage demands. The rhetoric overall suggested strongly that she would want to wait and assess developments before raising interest rates, but there were expectations that a majority would back an early rate increase.

Brexit Minister Frost stated that EU proposals do not go far enough, although the overall impact was limited as stronger global equities underpinned the Pound.

Overall, narrow ranges prevailed on Tuesday ahead of Wednesday’s budget statement and next week’s Bank of England policy statement with a further focus on inflation pressures with the government set to announce an increase in the minimum wage. GBP/USD traded around 1.3760 with EUR/GBP around 0.8430 as global risk appetite held firm.

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