The dollar drifted lower as Fed tightening expectations were scaled back slightly..

There were no major economic data releases on Monday. US yields recovered from intra-day lows, but there was still underlying downward pressure with hopes that inflation pressures were peaking.

Wall Street equities edged to another record high. Sentiment was slightly more cautious in Asia with further concerns over the Chinese real-estate sector.

The dollar drifted lower as Fed tightening expectations were scaled back slightly. EUR/USD edged above 1.1600 on Tuesday. There was stronger yen demand as US yields declined with short covering also a key element and 4-week USD/JPY lows. Sterling recovered ground after heavy selling last week with BoE rate-hike speculation back in focus.

Commodity currencies secured tentative net gains as the US dollar retreated. Oil prices were capped by expectations of US action to curb prices, but sentiment held firm.

The Euro-zone Sentix investor confidence index strengthened to 18.3 for November from 16.9 the previous month and contrary to expectations of a limited retreat which underpinned sentiment. The dollar was unable to make headway into the New York open with the Euro edging higher.

St Louis Fed President Bullard stated that he expects GDP growth to exceed 4% in 2022 and that there would be two interest rate hikes and that action on interest rates may need to be sooner if inflation is more persistent. Fed Chair Powell made no comment on the economy or interest rates in his prepared remarks.

Vice-Chair Clarida stated that inflation expectations are mission critical for the central bank. He was also optimistic over the labour market and that full employment must be consistent with the goal of price stability. Philadelphia Fed President Harker stated that he did not expect interest rates to increase before the process of tapering bond purchases is completed. He added that officials are monitoring inflation and is prepared to intervene if circumstances justify it.

Chicago President Evans stated that it would make sense to think about a rate hike in 2022 if inflation expectations increase a lot, but he did not see that current wage developments were indicative of current policy being over accommodative.

The dollar overall was unable to make headway with markets continuing to scale back longer-term expectations of interest rate hikes which limited US currency support. There were also expectations that the central bank would tolerate higher inflation over the medium term which would tend to sap currency support.

The Euro secured net gains, although EUR/USD was held below 1.1600 into the European close. The dollar edged lower again on Tuesday with EUR/USD close to 1.1600.

There was choppy trading in US Treasuries following the New York open with initial buying fading as the 10-year yield was little changed.

The US employment cost index strengthened to 112.2 for October from 110.4 the previous month. The Conference Board stated that the labour market was likely to tighten further over the next year and reach the pre-pandemic level of 3.5% by the end of 2022 which would put upward pressure on wages.

Fed Governor Quarles announced that he would resign at the end of December which will provide another vacancy for President Biden to fill. Markets will be on alert for an announcement whether Powell will be nominated for a second term as Fed Chair. Fed rhetoric did not have a significant impact and the dollar was unable to make headway amid a wider loss of support with USD/JPY retreating to lows near 113.00 before a limited correction to 113.20.

There was further uncertainty surrounding the Chinese real-estate sector with reports of key meetings between banks and property developers. One developer, Kaisa, stated that it needs external help to pay creditors. Overall risk conditions were more cautious in Asia and the net decline in US bond yields triggered significant yen gains during the session. USD/JPY dipped to 4-week lows near 112.70 before a slight recovery to 112.90 with EUR/JPY just below 131.00.

After losing ground at the European open, Sterling was able to recover ground during Monday. Given upward pressure on inflation rates, there was additional speculation that the Bank of England would sanction an increase in interest rates at the December policy meeting.

Additional demand for commodity currencies also provided an element of support for the UK currency with a covering of short positions.

There was also fresh buying support as GBP/USD moved back above the 1.3500 level and triggered an element of short covering with highs above 1.3550. GBP/EUR also rallied to highs above 1.1700 before stabilising amid wider gains.

There were still reservations surrounding Brexit developments and confidence in reading Bank of England intent was still notably weak following last week’s decision not to raise rates. BRC data suggested firm consumer spending trends.

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