EUR / USD
There was a flurry of comments from ECB officials ahead of Wednesday’s New York open. Bank President Lagarde stated that the outlook for inflation over the medium term remains subdued. She commented that the bank’s forward guidance outlined three conditions that need to be satisfied before raising rates and added that these conditions are unlikely to be satisfied next year. Lagarde also reiterated that it was important for monetary policy to provide support to the recovery. Fellow member Villeroy also stated that there was no reason for rates to be increased next year. De Cos stated that the inflation surge is likely to be transitory, but could be more persistent than estimated initially, but the overall dovish stance undermined potential Euro support with consolidation below 1.1600 against the dollar.
ADP data reported a 571,000 increase in non-farm payrolls for October after a revised 523,000 increase previously. The increase was above market expectations of 400,000 and the strongest gain for four months. ADP reported job increases across all company sizes and all main sectors which suggested a robust labour market.
The Federal Reserve held interest rates at 0.25%. It announced tapering in bond purchases with an initial reduction to $105bn from $120bn per month in November and a further $15bn decline in December. The process is set to continue next year be completed around mid-year with both decisions in line with expectations.
The statement was slightly more optimistic, but with no major changes. Chair Powell reiterated that there was no link between tapering and interest rates and it was not time to raise rates given overall trends in the labour market. Powell was optimistic that inflation would decline by the second or third quarters of 2022, although the outlook was uncertain. The overall reaction was muted, but the dollar lost ground with the rhetoric relatively dovish as Powell stuck to the transitory inflation theme.
The Euro moved back above the 1.1600 level, but the dollar recovered ground on Thursday with the Euro back below the 1.1600 level and around 1.1580.
Narrow ranges prevailed ahead of Wednesday’s Federal Reserve policy decision with the dollar trading just below 114.00 after failing to hold above this level.
The US ISM non-manufacturing index strengthened to a record high of 66.7 for October from 61.9 the previous month and above consensus forecasts of 62.0. There was a very strong rate of growth n new orders and business activity, although there was only a slight increase in employment as companies found difficulties in filling posts. Supplier delivery times continued to increase and there was further upward pressure on prices with the strongest reading on record for the prices index.
The dollar edged higher against the yen following the data with strong activity and inflation pressures pushing market yields higher.
Treasuries were mixed following the Federal Reserve policy decision with a net increase in the 10-year yield, but the dollar edged below the 114.00 level while the yen lost ground on the crosses. Japan’s PMI services index moved back into positive territory for October, the first expansion for 21 months. Asian equities posted limited net gains and the dollar secured a limited net advance to 114.25 against the yen with the Euro posting a net advance to 132.30.
The final UK PMI services index was revised to a 3-month high of 59.1 for October from the flash reading of 58.0. Companies reported strong demand and staff shortages which contributed to further upward pressure on costs. Costs increased at the fastest rate for over 25 years and average prices increased at the fastest pace on record. Sterling was able to regain some ground during the day with an element of short-covering ahead of Thursday’s Bank of England policy decision.
The UK currency edged above 1.3650 against the dollar while the Euro retreated to near 0.8470 before recovering slightly.
Sterling gained some relief following the Federal Reserve policy decision but was blocked close to 1.3700 against the dollar. Investment banks are split on whether the Bank of England will raise interest rates to 0.25% from 0.1% while the overall commentary will also be crucial for the Sterling reaction. Given higher money-market yields markets expect a very hawkish stance will be needed to trigger Sterling gains. The UK currency retreated to near 1.3650 against the dollar with the Euro around 0.8480.
After losing ground on Tuesday the Swiss franc was resilient on Wednesday with selling pressure resisted. The Euro was unable to break above 1.0600 and edged lower to 1.0580 while the dollar posted limited losses. Longer-term global inflation concerns continued to provide an element of Swiss currency support.
Markets were still wary over the threat of National Bank franc selling with expectations that franc sales have been increased this week. The Euro was unable to make headway on Thursday while the dollar secured a slight net advance to the 0.9130 area.