EUR / USD
The Euro dipped sharply in early Europe trading on Friday. Austria announced that there would be a full lockdown in the country to combat the sharp increase in coronavirus cases. The situation in Germany also caused significant alarm with the threat of further restrictions. Fears over the Euro-zone outlook undermined the currency and the dollar secured net gains on defensive grounds. The sharp Swiss franc gains against the single currency also undermined the wider Euro performance.
ECB President Lagarde reiterated that the conditions for an increase in interest rates were unlikely to be met in 2022 and that it does not make sense to tighten monetary policy when inflation pressures are expected to fade. The Euro dipped to 16-month lows at 1.1250 before securing a tentative recovery.
Fed Governor Waller stated that inflation pressures are becoming more widespread and will last longer in 2022 than expected. He is also concerned that inflation will get embedded into wage demands. He added that he favoured a faster pace of tapering and a more rapid increase in interest rates. The overall tone from Waller was significantly more hawkish than previously and vice-chair Clarida also commented that a faster pace of tightening might be necessary.
The dollar was unable to capitalise on the more hawkish rhetoric and the Euro recovered to trade back above the 1.1300 level at the European close.
CFTC data recorded a fresh switch back to a short Euro position which could limit the potential for further near-term selling.
The dollar overall held firm on Monday and close to 16-month highs with coronavirus trends continuing to undermine Euro support with the single currency near 1.1270.
US Treasuries rallied sharply as risk appetite dipped on Friday with the 10-year yield sliding to around 1.50%. Lower yields undermined the dollar and the yen also gained strong defensive support, especially given the extent of short positions. In this environment, the dollar retreated to lows at 113.80.
CFTC data recorded a significant reduction in short yen contracts to below 100,000 contracts, although there is still the potential for further short covering.
Markets will remain on alert for a US Administration announcement over who the Federal Reserve chair nomination with Biden expected to announce before the Thanksgiving Holiday whether Powell will get a second term or whether Brainard will be nominated instead.
Market conditions were relatively calm on Monday with Asian equities able to make limited net headway while US yields drifted lower amid hopes that supply-side pressures will start to ease. The dollar found some support below the 114.00 level and consolidated around 114.15 in early Europe with the Euro around 128.70.
Sterling dipped sharply after Friday’s European open with the currency undermined by the slide in risk appetite and sharp dollar gains.
Bank of England chief economist Pill stated that some patience will be required before inflation returns to 2%. He added that he did not know how he will vote in December. Pill added that that the first rate increase would not necessarily be 15 basis points and that the burden of proof on the back of recent data is on those not wanting to raise rates. Sterling did find support just above 1.3400 against the dollar and the Euro rally was held around 0.8430.
UK Brexit Minister Frost stated that significant gaps remain across most issues. EU Commission vice president Sefcovic stated that the recent change in tone must lead to tangible solutions. Sterling rallied to above 1.3450 at the European close as rate speculation continued while the Euro retreated to near 0.8400.
CFTC data recorded a further sharp increase in short Sterling positions in the latest week to over 30,000 contracts from 12,000 previously and the largest short position since June 2020. The positioning will increase the scope for a position squeeze if the currency strengthens.
In comments over the weekend, Bank of England Governor Bailey fuelled underlying uncertainty with comments that there is a two-sided debate over inflation.
Sterling settled just below 1.3450 against the dollar on Monday with the Euro held below the 0.8400 level and close to 20-month lows.
The Swiss franc posted sharp gains in early Europe on Friday with the Euro sliding below the 1.0500 level as the National Bank did not intervene to defend this important level. The franc drew support from fears over European coronavirus developments. The Euro dipped to 6-year lows at 1.0450 before recovering some ground later in the session. Moves against the dollar were relatively contained with the US currency around 0.9260 at the European close.
The franc edged lower on Monday with reservations over potential National Bank intervention and the dollar was close to 0.9300, but overall franc demand held firm.