EUR / USD
The German Bundesbank commented that inflation was likely to peak between 4-5% by year end and could stay above 2% until at least mid-2022. ECB President Lagarde stated the bank’s baseline scenario is still that inflation stays below 2% over the medium term and that the inflation upswing is largely temporary.
The comments maintained expectations that the ECB would continue to pursue a very accommodative monetary policy, limiting Euro support.
There was further speculation that the process of forming a government could take months while SPD leader Scholz stated that a new government would be formed by Christmas. The Euro dipped lower to test support below 1.1700, although narrow ranges prevailed.
Chicago Fed President Evans stated that the threshold for tapering bond purchases is likely to be met soon if the labour market continues to strengthen. He added that a low unemployment rate does not necessitate a change in the policy rate if inflation has not reached unacceptably high levels. He added that with inflation still struggling to hit 2%, the jobless rate might decline to 3.5%. He expects one interest rate increase in 2023 and a gentle incline after that.
The dollar dipped lower following the comments, but selling pressure was limited and the Euro continued to test support below 1.1700.
San Francisco Fed President Williams reiterated that tapering may soon be warranted, but the criteria for an increase in interest rates are still a long way off.
Governor Brainard commented that employment was a bit short of the bar for tapering, but might meet it soon while she was vigilant for signs that the current high inflation rates might increase inflation expectations. The main takeaway from Fed officials was the insistence that an interest rate hike was a long way off which curbed potential dollar support. Commodity currencies posted limited gains on Tuesday, but the Euro was held just below 1.1700 on yield grounds.
US durable goods orders increased 1.8% for August from 0.5% previously and above consensus forecasts of 0.7%. Underlying orders declined 0.2% on the month, below market expectations of a 0.5% increase. There was choppy trading in Treasuries around the New York open with the 10-year yield increasing to 1.52% before a dip back below 1.48% and the dollar was unable to hold above the 111.00 level.
Markets continued to monitor the US congressional budget negotiations amid an October 1st deadline to avoid a Federal government shutdown.
Equities were held in relatively narrow ranges during the day with the yen unable to gain sustained support as the US currency consolidated below 111.00.
Chinese industrial profits increased 10.1% in the year to August from 16.4% previously and Chinese equities posted net gains, although overall trends in Asia were mixed. US bond yields edged higher again and the dollar strengthened to 12-week highs around 111.25 before settling around 111.10 with the Euro just above 130.00.
Although there were further important concerns over the economic outlook, currency markets also noted that other major economies were facing problems surrounding soaring energy prices. Sterling posted net gains in early Europe on Monday and there was also underlying support on yield grounds which provided a significant element of protection. Sterling peaked around 1.3730 against the dollar before fading while the Euro retreated to just below 0.8530.
Bank of England Governor Bailey stated that the rate of recovery had slowed over recent months and that slowdown is continuing. He was still optimistic that most of the increase in inflation is transitory and estimated that the underlying rate of growth in earnings is around 4%. He did, however, note the importance of inflation expectations and insisted that the bank will keep a very watch on developments. He also commented that interest rates could be increased before the end of the asset-purchase programme which maintained speculation that rates could be increased this year. Despite the caveats, Sterling traded above 1.3700 against the dollar on Tuesday as underlying expectations that interest rates could increase this year underpinned the UK currency. The Euro was around 0.8530 as the global risk appetite held steady.
Swiss sight deposits declined slightly to CHF714.5bn in the latest week from CHF714.7bn the previous week which again suggested that the National Bank had not been intervening significantly in currency markets to weaken the franc which limited the appetite for further selling.
The Swiss currency lost ground in early Europe on Monday with higher global bond yields undermining support. The Euro peaked around 1.0865, but gradually lost ground later in the day to post only marginal gains while the dollar was unable to challenge 0.9300 and settled around 0.9265 on Tuesday with the Euro around 1.0840.