Sterling posted further net gains on speculation over a hawkish Bank of England stance.

Confidence in US growth strengthened during Tuesday with robust US services-sector data. Wall Street equities also posted a solid advance during the day.

There was a more defensive mood on Wednesday as high energy prices and inflation concerns pushed US bond yields to 3-month highs. US futures moved lower and Asian bourses lost ground amid inflation concerns.

The dollar initially retreated as strong equities eroded defensive buying interest, but secured fresh gains on Wednesday. EUR/USD was unable to hold above 1.1600. Sterling posted further net gains on speculation over a hawkish Bank of England stance. Commodity currencies were unable to hold gains as the US dollar rebounded.

The final Euro-zone PMI services index reading was revised marginally higher to 56.4 from the flash reading of 56.3, but both the Italian and Spanish readings were below market expectations for the month. The weaker than expected readings in these countries reinforced concerns that the surge in energy prices will undermine activity, especially in southern Europe where the increase in costs has been most extreme.

ECB President Lagarde stated that the bank will pay close attention to wage developments but remained confident that higher inflation would be transitory.

The US IBD consumer confidence index retreated further to 46.8 for October from 48.5 previously and the lowest reading since September 2020.

The ISM non-manufacturing index edged higher to 61.9 from 61.7 previously and above consensus forecasts of 60.0. There was a stronger rate of growth in activity with new orders also increasing at a more rapid rate on the month. There was a slight slowdown in the rate of employment growth while delivery times continued to lengthen.

There was a faster rate of cost increases on the month with all sectors reporting higher prices on the month, reinforcing inflation concerns.

The dollar posted limited gains, although relatively narrow ranges prevailed. The US currency was unable to gain significant traction, especially as a strong rebound in equities curbed potential defensive support and EUR/USD settled just above 1.1600.

The latest ADP jobs data will be released on Wednesday which will have an impact on expectations surrounding Friday’s payrolls data. The dollar overall posted net gains as yields moved higher with EUR/USD edging lower to 1.1580.

US Treasuries lost ground following the US data releases as markets continued to focus on threats of higher inflation in the economy.  Wall Street equities also posted strong gains after the New York open which curbed potential demand for the Japanese currency. Overall, the dollar posted net gains into the European close with USD/JPY advancing to highs above the 111.50 level against the Japanese currency.

Chicago Fed President Evans remained confident that prices will come down as supply chains improve, but he also admitted that bottlenecks were taking longer to resolve. Overall markets concerns surrounding the inflation profile tended to increase during the day.

The US trade deficit increased to a record high of $73.3bn for August from $70.3bn the previous month as imports rebounded strongly. There will be a risk that the widening deficit will undermine the dollar if US assets prices stumble for a sustained period, but the dollar held a firm tone into the New York close.

US bond futures lost ground in Asia on Wednesday with the 10-year yield strengthening to the highest level for over 3 months. Chinese markets remained closed on Wednesday while equity markets moved lower. Yield trends dominated with USD/JPY posting a net gain to around 111.75 with EUR/JPY around 129.40.

The final UK PMI services sector index was revised higher to 55.4 from the flash reading of 54.6 with the composite index also revised higher. The data reported that staff shortages were holding back both output and new orders while supply constraints and a spike in costs triggered further upward pressure on prices with output charges rising at a record pace. There were reports that Prime Minister Johnson will announce an increase in the minimum wage.

The PMI data offered some Sterling encouragement while immediate fears surrounding fuel shortages continued to ease. The UK currency gained an element of support on valuation grounds and expectations of capital inflows.  The strong advance in Wall Street equities was also a significant factor underpinning risk sentiment.

Sterling was unable to make headway on Wednesday with a GBP/USD drift towards the 1.3600 level against the stronger US dollar, although it held firm on the major crosses.

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