EUR / USD
German consumer confidence edged higher to 0.3 for September from -1.1 the previous month and above consensus forecasts of -1.6 with little Euro impact.
The dollar posted net gains into Tuesday’s New York open with the US currency gaining support on yield grounds as well as an element of defensive demand as risk appetite deteriorated and equity markets came under pressure. The Euro was also unable to gain support and there was a more decisive break below the 1.1700 level as the lack of yield continued to erode support with a retreat to near 1.1675 at the US open.
The Case Shiller house-price index increased 1.5% for July after a 1.8% increase the previous month with the year-on-year increase at 19.9% from 19.1% previously and marginally below consensus forecasts.
Consumer confidence retreated further to a 5-month low of 109.2 in September from 115.2 in August and below market expectations. The current conditions index dipped to 143.4 from 148.9 while the expectations component retreated to 86.6 from 92.8 which triggered fresh reservations over the consumer spending outlook.
The Richmond Fed manufacturing index retreated sharply to -3 for September from 9 in August and well below market expectations of 12 with a sharp decline in new orders on the month. Labour market indicators eased slightly on the month, but cost pressures remained intense with input prices increasing at a record pace.
St Louis Fed President Bullard stated that policy normalisation could take place quicker than in 2007-2009 and he expected two interest rate increases in 2022.
Chair Powell reiterated that the test for tapering bond purchases had all but been met. The dollar maintained a robust tone and strengthened to 10-month highs as commodity currencies retreated sharply and there was also an element of month-end US demand. The Euro dipped to lows around 1.1670 before rallying slightly to 1.1680 with the dollar holding a firm tone on Wednesday as US yields continued to underpin the US currency.
The US goods trade deficit widened slightly to $87.6bn for August from $86.8bn the previous month and close to market expectations. There was a small increase in exports for the month and a slightly larger increase in imports for the month. The trade deficit could return as a medium-term negative factor for the dollar.
US yields continued to edge higher ahead of Tuesday’s New York open which underpinned the US dollar and offset the impact of weaker equities. The US currency secured net gains to around 111.50 while the Euro was able to hold just above the 130.00 level against the Japanese currency.
Treasury Secretary Yellen stated that the US was likely to hit the debt ceiling by October 18th which helped concentrate the market focus on the debt issued and the threat of government shutdown. The further erosion in equity prices curbed the potential for further yen selling as risk appetite deteriorated.
There were assumptions that the latest Evergrande coupon payment would be missed and enter the 30-day grace period, but with no official news out of China.
The S&P 500 index declined 2.0% and markets were generally on the defensive on Wednesday with the dollar stabilising close to 111.50 with the Euro above 130.0.
Sterling was unable to make headway in early Europe on Tuesday and losses gradually accelerated during the session. The UK currency was hurt by the weaker tone surrounding risk appetite and was also undermined by increased reservations over the domestic outlook amid the surge in energy costs and supply difficulties.
New Bank of England MPC member Mann stated that the further increase in market inflation expectations to an 8-year high is not troubling which triggered renewed speculation that she would take a dovish stance on the committee. There were further concerns surrounding the impact of energy costs.
The comments further eroded UK currency support with a break of technical support between 1.3570 and 1.3600 further eroding confidence. Overall, the Pound slumped to 8-month lows around 1.3525 while the Euro strengthened sharply to 0.8630. There was some stability on Wednesday, but confidence remained fragile amid further concerns that soaring energy costs and disruption would damage the economy. Sterling was held around 1.3550 against the dollar with the Euro around 0.8525.
The Swiss franc held firm in early Europe on Tuesday but was unable to gain fresh backing during the day despite a net dip in risk appetite and slide in equities. The Euro found support close to 1.0825 and secured a net gain while the dollar tested the 0.9300 level.
Volatility increased after the US open with the slide in equity markets triggering fresh demand for the Swiss currency, although gains were not sustained. The franc edged lower again on Wednesday with the Euro around 1.0855 and the dollar traded close to 0.9300 as low yields sapped potential franc support.