Federal Reserve comments reinforced concerns over US supply side issues and uncertainty over inflation.

Risk appetite remained slightly less confident during Wednesday amid reservations over the global outlook. Federal Reserve comments reinforced concerns over US supply side issues and uncertainty over inflation. Wall Street equities lost ground as uncertainty dominated. Global equity markets also retreated as inflation pressures continued to sap confidence.

The dollar posted net gains on fragile risk conditions but retreated slightly from intra-day highs. EUR/USD found support near 1.1800 ahead of the ECB policy meeting. Sterling rallied from intra-day lows with BoE comments not ruffling asset prices, but GBP/USD was held below 1.3800. USD/CAD posted net gains with high volatility following the Bank of Canada policy decision which was close to expectations. Weaker risk conditions hampered overall commodity currencies.

There were no significant Euro-zone data releases on Wednesday which dampened market activity ahead of the New York open. The dollar overall maintained a firm tone with EUR/USD drifting weaker to lows around 1.1810 as commodity currencies also lost further ground. There was further caution ahead of Thursday’s ECB policy meeting with further speculation that the statement will have to take account of the more hawkish views on the council.

US job openings increased to a fresh record high of 10.93mn for July from a revised 10.19mn the previous month and well above market expectations of 10.00mn. The data-maintained expectations of a very tight labour market, especially with the number of job openings higher than the number of registered unemployed.

The IBD consumer confidence index, however, dipped to a fresh 2021 low of 48.5 for August from 53.6, reinforcing some reservations surrounding consumer spending.

New York Federal Reserve President Williams stated that it could be appropriate to start reducing the pace of asset purchases this year, but he wants to see further improvement in the labour market and there is still a long way to go before getting back to full employment. Dallas head Kaplan stated that the delta variant is having a negative impact on the travel and leisure sectors. Nevertheless, he noted that he wants to start the process of slowing asset purchases at the earliest opportunity. Supply-side issues will continue to cause important distortions in the short term increasing the threat of market volatility.

Overall, the dollar edged higher on Thursday with EUR/USD around 1.1815 ahead of the ECB decision.

US Treasuries were resilient ahead of Wednesday’s New York open with USD/JPY edging lower amid a lack of follow-through buying following the break above the 110.00 level against the Japanese currency. Treasury Secretary Yellen stated that the most likely outcome is that the cash would run out during October if there was no increase in the debt ceiling. USD/JPY was able to find support on approach to the 110.00 level and recovered into the European close.

The Federal Reserve Beige Book on economic activity stated that the growth in activity had slowed due to the delta variant and serious supply-side difficulties. The labour market remained very tight with upward pressure on wages and companies were looking to raise prices.

Japan will extend the state of emergency in Tokyo until the end of September, maintaining unease over underlying trends. Chinese CPI inflation data was slightly below expectations at 0.8%, but producer prices increased 9.5% over the year, the strongest rate of increase for 13 years.

USD/JPY settled around 110.15 on Thursday with EUR/JPY just above the 130.0 level as regional and global risk conditions remained less confident.

Sterling edged lower in early Europe on Wednesday with further reservations that higher tax rates would undermine the economic recovery. There was also speculation that the move to raise taxes would limit the scope for any Bank of England tightening which would sap Sterling support.

GBP/USD dipped to lows near 1.3725 around the US open while GBP/EUR again tested the 1.1650 resistance area.

In testimony to the Treasury Select Committee, Bank of England stated that he believed some tightening of monetary policy would be needed if the economy develops as expected. He also noted that the bank was seeing some short-term levelling off in the recovery and he did not think that inflation will be persistent. In Bailey’s view, minimum conditions for an interest rate increase had been met, but a hike was not warranted at this stage while the committee was split on the issue. Deputy Governor Broadbent added that labour-market pressure on inflation could persist while Ramsden noted that he will be monitoring the inflation data closely.

The RICS house-price index eased to 73% for August from 77% as supply remained weak while there was further evidence of a very tight labour market. Sterling stalled on Thursday and GBP/USD traded around 1.3760.

Economic Calendar