EUR / USD
Minutes from September’s ECB policy meeting stated that the near-term increase in inflation is largely driven by temporary factors and that an accommodative stance remains necessary. ECB council member Schnabel reiterated that the current inflation rise is largely due to temporary factors and that over-reacting to the current inflation dynamic could be harmful. She added, however, that supply-chain disruptions could have a more durable effect on prices.
Fellow council member Stournaras added that inflation will fall back below 2.0% over the medium term which curbed demand for the single currency.
The Euro overall drifted lower into the New York open, although narrow ranges prevailed as firm risk conditions also limited potential dollar support.
US initial jobless claims declined to 326,000 in the latest week from a revised 364,000 previously which was below consensus forecasts of 348,000 and the second-lowest reading for 14 months. Continuing claims also declined to 2.71mn from 2.81mn and slightly below market expectations. The data maintained expectations that Friday’s jobs report would register a much stronger increase, although there was still an important element of uncertainty given structural issues.
The dollar edged higher after the data, but there was a dip in defensive demand as equities rallied strongly and commodity currencies posted solid gains. In this environment, the Euro edged lower, but was able to hold around 1.1550. The dollar held firm on Friday ahead of the jobs data with the Euro around 1.1550 and close to 14-month lows. Strong US jobs data would reinforce expectations that the Federal Reserve will announce a tapering of bond purchases at the November meeting with consensus forecasts for an increase in non-farm payrolls of close to 500,000. In contrast, weak data would trigger fresh reservations over Fed policies.
US Treasuries dipped lower after the New York open with the 10-year yield rising to around 1.55% as the jobless claims data boosting confidence in Friday’s labour-market report. The dollar posted limited net gains against the yen, although there was selling interest above the 111.50 level.
US Democrat Senate Majority Leader Schumer stated that a deal had been reached to raise the debt limit until early December which helped underpin risk appetite.
Kansas City Fed President Mester stated that policymakers need to figure out how much of inflation is driven by supply side pressures. Markets continued to sense that underlying inflation concerns were increasing within the central bank which underpinned US yields and the dollar.
The Senate approved a short-term increase in the debt limit after the New York close which also helped underpin sentiment.
The Chinese Caixin PMI services index strengthened to 53.7 for September from 46.7 previously and above consensus forecasts of 50.7. The data underpinned confidence in the outlook and Chinese bourses posted a limited gain as Chinese markets re-opened following holidays, but property-sector concerns persisted.
US yields continued to move higher with the dollar strengthening to near 112.00 against the yen with the Euro around 129.25.
Halifax reported that house prices increased 1.7% in September with the annual increase strengthening to 7.4% from 7.2% previously.
Bank of England chief economist Pill stated that current inflation strength looks to prove more lasting than anticipated originally and added that the balance of risks is shifting towards greater concerns about the inflation outlook. He also stated that interest rates are expected to remain at relatively low levels, but the rhetoric reinforced market expectations that the central bank would push towards an early increase in interest rates.
These interest rate expectations and higher yields supported Sterling and there was also increased support from strength in equity markets and robust risk conditions. The UK currency moved back above 1.3600 against the dollar with highs around 1.3630 while the Euro retreated to 0.8480.
Sterling was unable to make further headway on Friday as it traded around 1.3600 against the dollar with the Euro below the 0.8500 level.
The seasonally adjusted Swiss unemployment rate edged lower to 2.8% for September from 2.9% previously. The Swiss franc maintained a firm tone in European trading on Thursday despite the significant net gains in equity markets with expectations that the ECB would maintain zero interest rates.
The franc did edge lower as equities continued to gain ground with the Euro recovering to near 1.0730 while the dollar was held around 0.9280. The franc edged lower on Friday as global bond yields increased with the Euro around 1.0735 and the dollar close to 0.9300.