Risk appetite initially strengthened but stumbled again later in the session as overall confidence in the global outlook deteriorated.

US Consumer prices data overall was slightly weaker than expected, especially for the core reading. The data had only a limited impact on Federal Reserve policy expectations. US bond yields edged lower after the data.

Risk appetite initially strengthened but stumbled again later in the session as overall confidence in the global outlook deteriorated. Wall Street equities failed to hold gains and posted significant losses. Asian equities overall were little changed.

The dollar briefly touched 1-week lows before recovering ground. EUR/USD was held below 1.1850 and dipped back to 1.1800. Sterling retreated sharply from best levels with GBP/USD sliding to near 1.3800 from above 1.3900, but higher inflation stemmed potential selling. Commodity currencies failed to hold gains and posted net losses.

The US NFIB small-business confidence index edged higher to 100.1 for August from 99.7 previously. The dollar was held in tight ranges ahead of the New York open with no major Euro-zone developments, although markets were monitoring developments surrounding the German election this weekend.

US consumer prices increased 0.3% in August after a 0.5% increase the previous month and slightly below consensus forecasts. The year-on-year rate edged lower to 5.3% from 5.4% previously and in line with consensus forecasts. The underlying increase was held to 0.1% from 0.3% previously and below market expectations of 0.3% with the year-on-year rate declining to 4.0% from 4.3%.

Energy prices increased 2.0% on the month with an annual increase of 25%. There was a monthly decline in used car prices with the annual increase declining to 31.9% while overall services excluding energy were unchanged on the month. The data bolstered the argument that overall inflation pressures would be transitory.

The dollar dipped lower after the data with increased confidence that inflation would moderate and limit the potential for a more aggressive stance from the Federal Reserve. There were no comments from Fed officials with the central bank in a blackout period ahead of next week’s policy meeting.

The dollar regained ground after the Wall Street open and EUR/USD hit resistance on approach to 1.1850 with a retreat to near 1.1800 after the European close as fragile risk conditions curbed any selling. The US currency was unable to extend the gains on Wednesday with EUR/USD holding just above the 1.1800 level.

US Treasuries strengthened after the US inflation data with the 10-year yield retreating to near 1.30%. US equity futures also posted initial gains, although selling pressure returned quickly which maintained a cautious risk tone. The yen gained significant support with USD/JPY retreating to around 109.65 at the European close.

Japan’s Reuters tankan manufacturing index dipped sharply to a 5-month low of 18 from 33 the previous month with important supply-side difficulties while the services-sector index dipped to -2 from 5 previously. The data maintained unease surrounding the near-term outlook, although companies did expect conditions to recover.

Chinese industrial production increased 5.3% in the year to August from 6.4% previously and below consensus forecasts of 5.8%. There was a very substantial miss for retail sales with the annual increase held to 2.5% from 8.5% previously and compared with expectations of 6.9%.

The data triggered a fresh round of unease over the Chinese outlook, especially with on-going concerns over the Evergrande situation with the property giant likely to miss near-term loan repayments. Chinese equity markets were, however, resilient which helped underpin risk appetite. USD/JPY was held near 109.50 as the yen maintained a solid tone with EUR/JPY around 129.40.

Sterling edged lower following the latest labour-market data, although overall selling pressure was limited and there was solid buying support on dips and the UK currency regained ground into the New York open. There was further speculation that the tight labour market would trigger a tightening of monetary policy by the Bank of England. The government confirmed that there will be a third booster vaccine rollout for those aged over 50.

Sterling strengthened after the US inflation data, but GBP/USD was unable to hold 1-month highs above the 1.3900 level. UK Cabinet Minister Frost warned that the EU needed to show flexibility in talks over implementing the Northern Ireland trading arrangement or the UK may decide to unilaterally suspend the protocol.

Sterling was already losing traction and Brexit concerns triggered a further correction, especially with a significant impact from weaker risk appetite. There was a sharp GBP/USD retreat to near 1.3850 while GBP/EUR again found resistance near 1.1750 closing below 1.1700.

The headline UK CPI inflation rate increased sharply to 3.2% from 2.0% the previous month and above expectations of 2.9% with the core rate jumping to 3.1% from 1.9%. GBP/USD edged higher to 1.3820 amid speculation that the Bank of England would move closer to tightening, although the overall reaction was muted.

Economic Calendar

07:00GBP CPI (Y/Y)(AUG)2.90%2.00%
07:00GBP CPI (M/M)(AUG)0.50%0.50%
07:00GBP PPI Core Output (Y/Y)(AUG)3.9
07:00GBP PPI Output (Y/Y)(AUG)5.40%4.90%
07:00GBP PPI Input (M/M)(AUG)0.20%0.80%
07:00GBP PPI Input (Y/Y)(AUG)10.30%9.90%
09:00CPI (EU Norm) Prelim YY(AUG)2.10%
09:00CPI (EU Norm) Prelim MM(AUG)0.50%
09:00CPI (EU Norm) Final MM*(AUG)0.30%
09:00CPI (EU Norm) Final YY*(AUG)2.60%
10:00Euro-Zone Industrial Production (Y/Y)(JUL)9.70%
10:00Euro-Zone Industrial Production (M/M)(JUL)-0.30%
13:30USD Export Price Index (M/M)(AUG)0.8130.00%
13:30USD Import Price Index (M/M)(AUG)0.60%0.30%
13:30NY Empire State Manufacturing Index(SEP)2918.3
13:30CAD CPI (M/M)(AUG)0.30%0.60%
13:30CAD CPI (Y/Y)(AUG)3.70%
13:30Bank of Canada Core CPI (M/M)(JUL)0.60%
13:30Bank of Canada Core CPI (Y/Y)(AUG)3.30%
14:15USD Capacity Utilization(JUL)75.70%76.10%
14:15USD Industrial Production(AUG)0.50%0.90%
23:45NZD GDP (Y/Y)0.90%2.40%
23:45NZD GDP (Q/Q)0.50%1.60%

*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.