Risk appetite was less confident during Monday amid reservations over the global economic outlook.

Risk appetite was less confident during Monday amid reservations over the global economic outlook.

Wall Street equities lost ground, although selling pressure was limited. Asian equities overall lost ground even though Japan bucked the trend. US bond yields increased to 7-week highs despite recovery doubts.

The dollar regained some territory as US yields moved higher. EUR/USD drifted lower to trade below 1.1850. The Swiss franc and yen lost ground as US bond yields moved higher. Sterling retreated on unease over higher taxes, but EUR/GBP hit selling above 0.8600. Commodity currencies lost ground as global reservations and US dollar gains sapped support.

The German ZEW economic sentiment index dipped to 26.5 for September from 40.4 the previous month and consensus forecasts of 30.0. The current conditions component strengthened to 31.9 from 29.3, but slightly below market expectations while the Euro-zone sentiment index retreated to 31.1 from 42.7.

Latest opinion polls recorded a further dip in support for the CDU/CSU centre-right party, reinforcing political uncertainty ahead of the September 10th Federal Election. Concerns over prolonged uncertainty and instability after the election hampered the Euro to some extent.

There was still an element of caution over Euro selling ahead of Thursday’s Bundesbank policy meeting. The dollar, however, gained support from higher yields on the day and there were also significant losses for commodity currencies which underpinned the US currency.

Overall, the dollar gained net traction and EUR/USD retreated to 1.1840 after failing to make any further challenge on the 1.1900 area.

There was little change on Wednesday with markets monitoring fresh comments on the economy and monetary policy from Federal Reserve officials. The US currency held firm in early Europe with EUR/USD edging lower to near 1.1830 despite further caution over selling ahead of Thursday’s ECB policy meeting.

US Treasuries lost ground on Tuesday with the 10-year yield increasing to 7-week highs above 1.38% after the Wall Street open. Higher yields underpinned the dollar and the yen was able to secure only limited support from a retreat in Japanese equities. In this environment, USD/JPY strengthened to 110.20 after the US open.

Two important US unemployment benefit programmes came to an end on Monday and additional benefit payments also expired. Markets will be monitoring the impact on short-term labour-market trends which could also be important for Federal Reserve policy.

Asian equity markets held steady on Wednesday which curbed currency-market volatility, although there were still reservations over potential Chinese economic reform measures. US bond yields stabilised in Asia on Wednesday which limited the potential for further dollar buying, although overall demand for low-yield currencies remained low. USD/JPY posted further net gains to just above 110.40 in early Europe with EUR/JPY around 130.65.

Halifax reported an August increase in house prices of 0.7%, but the annual increase slowed to 7.1% from 7.6%. Sterling was unable to make any headway ahead of the New York open and gradually drifted lower ahead of the New York open with markets focusing on fiscal policy.

Prime Minister Johnson conformed that there would be an increase in national Insurance rates to 13.25% from 12%. Dividend tax rates will also be increased to help fund increased health spending in the short term and reform social care over the medium term. The announcement increased speculation that higher tax rates would undermine consumer spending and undermine the UK economic recovery which hampered UK currency sentiment.

Bank of England external MPC member Saunders reiterated that the economy no longer needs as much stimulus as previously. He was also concerns that continuing asset purchases when the inflation rate is above 4% could increase medium-term inflation expectations and force a more severe monetary response later.

Sterling was unable to gain significant support from the comments, especially as he noted that only a limited increase in interest rates would be appropriate.

GBP/USD retreated to lows around 1.3770 and EUR/GBP retreated to 7-week lows at 1.1610 before a fresh retreat back above the 1.1635 level.

Economic Calendar

Expected Previous
09:10 RBA Assist Gov Debelle Speaks
12:00 USD MBA Mortgage Applications -2.40%
15:00 USD JOLTs Job Openings(JUL) 9.281M 10.073M
15:00 CAD Ivey PMI(M/M)(AUG) 56.4
15:00 BOC Rate Statement
15:00 CAD BoC Rate Decision 0.25% 0.25%
16:00 U.K. Inflation Report Hearings
18:10 FOMC member John C. Williams speech
20:00 USD Consumer Credit(JUL) 37.69B

*All rates shown are indicative of interbank rates and should only be used for indication purposes only. It is important to note that foreign exchange rates fluctuate and that rates may vary depending on the amount and the base currency that is purchased or sold. Rates are correct as of 8:00am UK time. CentralFX are not responsible for the rates shown.