EUR / USD
The German IFO business confidence index retreated to 97.7 for October from a revised 98.9 previously and marginally below consensus forecasts of 97.9. The current conditions component edged lower but was above market expectations while the expectations index retreated more sharply to 95.4 from 97.4 in September.
The IFO institute stated that the German economy is facing uncomfortable autumn with virulent difficulties in the industrial sector while supply-chain issues are having a negative impact on stores. The Bundesbank stated that economic growth will slow significantly in the fourth quarter of 2021 with supply chain difficulties continuing in the industrial sector while services momentum will also slow. There will also be further upward pressure on costs and prices amid supply issues.
ECB council member Cos stated that recent developments may see a significant downward revision to the economic outlook He also stated that relatively high inflation is likely to be seen in the coming months. The latest council meeting will be held on Thursday.
Weaker than expected German data and expectations that the ECB would maintain accommodative policy undermined the Euro with sharp losses into the US open. The dollar gained support from expectations that the Federal Reserve would push ahead with bond tapering at the November meeting, but defensive demand was weaker. The Euro dipped to lows at 1.1590 before a slight recovery. Narrow ranges prevailed on Tuesday with strength in commodity currencies and the Euro near 1.1600.
The dollar overall edged higher into Monday’s New York open, although overall moves were limited with a lack of fresh incentives. The Chicago Fed national activity index dipped to -0.13 from a revised 0.05 previously compared with the original release of 0.29. The Dallas Fed manufacturing index strengthened to 14.6 for October from 4.6 previously with markets focussed to an important extent on pricing pressures and global inflation pressures.
US Treasuries were mixed during the day with the dollar edging higher to 113.70 as markets engaged in a fresh round of reflation trades. There were further gains for US equities with the S&P 500 index posting a fresh record high while the tech sector posted strong gains which helped underpin the US currency.
There were no comments from Federal Reserve officials with the blackout period now in operation ahead of next week’s policy decision.
Chinese officials pledged further measures to alleviate power shortages, but there were further concerns that supply issues would undermine activity, especially in the car sector. There were expectations that the Bank of Japan would maintain a dovish stance at this week’s policy meeting. US Treasury futures edged lower in Asia with the dollar advancing to near 114.00 against the yen while the Euro held above 132.00.
Sterling drifted lower into Monday’s New York open with sellers encouraged by the inability to break above 1.3800 against the dollar.
Bank of England Monetary Policy Committee member Tenreyro stated that it is little the bank can do to affect some short-term inflation drivers with inflation likely to increase further in over the next few months. She added that domestic cost pressures will depend on evolution in the labour market now that the furlough scheme has ended. She also noted that higher inflation may feed through into higher wage demands. The rhetoric overall suggested strongly that she would want to wait and assess developments before raising interest rates, but there were expectations that a majority would back an early rate increase.
Brexit Minister Frost stated that EU proposals do not go far enough, although the overall impact was limited as stronger global equities underpinned the Pound.
Sterling found support below 1.3750 against the dollar and recovered to the 1.3770 area while the Euro retreated to 0.8430. Overall, narrow ranges prevailed on Tuesday ahead of Wednesday’s budget statement and next week’s Bank of England policy statement with a further focus on inflation pressures with the government set to announce an increase in the minimum wage. The UK currency traded around 1.3760 against the dollar with the Euro around 0.8430 as risk appetite held firm.
Swiss sight deposits increased to CHF715.3bn from CHF714.3bn the previous week which suggests that the National Bank has been slightly more active in currency markets to curb potential franc gains. The franc edged lower during the day, although overall selling pressure was still limited.
The Euro secured a marginal advance to 1.0775 while the dollar hit selling interest around 0.9200. Strong equity markets curbed franc demand to some extent with the Euro around 1.0680 on Tuesday and the dollar just above the 0.9200 level with markets continuing to monitor global inflation pressures.