EUR / USD
German second-quarter GDP growth was revised marginally higher to 1.6% from the flash reading of 1.5% with annual growth of 9.8% from 9.6%. There were, however, reservations over the third-quarter outlook, especially with the number of coronavirus infections increasing and supply shortages also in evidence.
An opinion poll for the German September Federal Election showed that the opposition SPD had overtaken Chancellor Merkel’s CDU for the first time in 15 years with the election outcome started to appear on the market radar. Tight ranges prevailed ahead of the US open with the dollar overall unable to gain any traction.
US new home sales increased slightly to an annual rate of 708,000 for July from a revised 701,000 the previous month and just above market expectations.
The Richmond Fed manufacturing index declined to 8 for August from 27 the previous month and below consensus forecasts of 25. There was also a slowdown in the rate of growth in new orders and shipments while inventories remained very low.
The Philly Fed non-manufacturing index retreated to 39.1 from 53.8 the previous month. There was a slight moderation in the wages and benefits index, although there was a significant increase in corporate inflation expectations. Employment trends remained firm with the wages index at a record high and there were still important supply-side issues. The prices received index eased slightly on the month, but there was a further surge in prices received. The combination of a moderation in growth trends, supply-side issues, tight labour markets and strong upward pressure on prices maintained an intense debate over appropriate monetary policy conditions.
The dollar remained on the defensive and the Euro secured net gains to 1.1765 before a retreat to just below 1.1750.
There was further caution ahead of Fed Chair Powell’s comments at the Jackson Hole symposium on Friday and the dollar edged higher during Wednesday’s Asian session with a reluctance to engage in aggressive positions. The Euro settled just below 1.1750 in early Europe as commodity currencies pared gains.
There was choppy trading in US Treasuries after the New York open with limited net losses as the 10-year yield edged higher to 1.28%. Equity markets were mixed with limited net gains and the yen was able to resist significant losses as the dollar settled around 109.70 at the European close.
Bank of Japan board member Nakamura stated that the economy is in a severe state, but picking up as a trend and is likely to recover as the pandemic impact begins to ease. Overall monetary policy will inevitably remain very accommodative.
During the Asian session, there were reports that the Chinese Ningbo container port would resume full operations. The Chinese central bank stated that it had increased short-term injections into the financial system in order to ease fears over tightening liquidity which also helped underpin risk appetite. Asian equities held steady on Wednesday, although there was still an important element of caution surrounding underlying regional trends.
Narrow ranges prevailed with the dollar around 109.75 against the yen with the Euro held just below 129.0.
The CBI retail sales index surged to 60 for August from 23 the previous month which was well above consensus forecasts of 20 and the strongest reading since December 2014. Retailers remained optimistic over the outlook, although supply-side concerns increased during the month while stock levels remained at very low levels and there was further upward pressure on costs. The data underpinned confidence over the short-term spending outlook, but Sterling retreated ahead of the New York open with solid risk conditions unable to trigger further buying interest.
Sterling retreated to test the 1.3700 area against the dollar before finding fresh support while the Euro found support below the 0.8550 level. Domestic influences remained limited at this stage as Sterling traded around 1.3720 against the dollar on Wednesday with the Euro holding above 0.8550.
The Swiss franc edged lower on Tuesday, although the currency remained resilient and there were only slight net losses. A solid tone in risk appetite was offset by expectations that global monetary policies would remain accommodative. The Euro posted net gains to around 1.0725 while the dollar edged higher to 0.9135.
There was further caution over the potential for National Bank intervention to weaken the Swiss currency, but low global yields continued to limit potential franc selling. The Euro secured a tentative advance to near 1.0740 on Wednesday with the dollar just below 0.9150.