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Federal Reserve comments reinforced concerns over US supply side issues and uncertainty over inflation.

Posted: 9th September 2021

Trade ideas & Daily market report September 9th 2021

Market highlights.

  • Risk appetite remained slightly less confident during Wednesday amid reservations over the global outlook.
  • Federal Reserve comments reinforced concerns over US supply side issues and uncertainty over inflation.
  • Wall Street equities lost ground as uncertainty dominated.
  • Global equity markets also retreated as inflation pressures continued to sap confidence.
  • The dollar posted net gains on fragile risk conditions, but retreated slightly from intra-day highs.
  • EUR/USD found support near 1.1800 ahead of the ECB policy meeting.
  • Sterling rallied from intra-day lows with BoE comments not ruffling asset prices, but GBP/USD was held below 1.3800.
  • USD/CAD posted net gains with high volatility following the Bank of Canada policy decision which was close to expectations.
  • Weaker risk conditions hampered overall commodity currencies.
  • Oil prices secured net gains and were underpinned by a lowering of US output projections and an inventory draw.
  • Precious metals lost ground again as the dollar held a firm tone.
  • Volatility in cryptocurrencies eased slightly with an element of buying on dips.

EUR/USD

There were no significant Euro-zone data releases on Wednesday which dampened market activity ahead of the New York open. The dollar overall maintained a firm tone with EUR/USD drifting weaker to lows around 1.1810 as commodity currencies also lost further ground. There was further caution ahead of Thursday’s ECB policy meeting with further speculation that the statement will have to take account of the more hawkish views on the council.

US job openings increased to a fresh record high of 10.93mn for July from a revised 10.19mn the previous month and well above market expectations of 10.00mn. The data maintained expectations of a very tight labour market, especially with the number of job openings higher than the number of registered unemployed.

The IBD consumer confidence index, however, dipped to a fresh 2021 low of 48.5 for August from 53.6, reinforcing some reservations surrounding consumer spending.

New York Federal Reserve President Williams stated that it could be appropriate to start reducing the pace of asset purchases this year, but he wants to see further improvement in the labour market and there is still a long way to go before getting back to full employment. Dallas head Kaplan stated that the delta variant is having a negative impact on the travel and leisure sectors. Nevertheless, he noted that he wants to start the process of slowing asset purchases at the earliest opportunity. Supply-side issues will continue to cause important distortions in the short term increasing the threat of market volatility.

Overall, the dollar edged higher on Thursday with EUR/USD around 1.1815 ahead of the ECB decision.

USD/JPY

US Treasuries were resilient ahead of Wednesday’s New York open with USD/JPY edging lower amid a lack of follow-through buying following the break above the 110.00 level against the Japanese currency. Treasury Secretary Yellen stated that the most likely outcome is that the cash would run out during October if there was no increase in the debt ceiling. USD/JPY was able to find support on approach to the 110.00 level and recovered into the European close.

The Federal Reserve Beige Book on economic activity stated that the growth in activity had slowed due to the delta variant and serious supply-side difficulties. The labour market remained very tight with upward pressure on wages and companies were looking to raise prices.

Japan will extend the state of emergency in Tokyo until the end of September, maintaining unease over underlying trends. Chinese CPI inflation data was slightly below expectations at 0.8%, but producer prices increased 9.5% over the year, the strongest rate of increase for 13 years.

USD/JPY settled around 110.15 on Thursday with EUR/JPY just above the 130.0 level as regional and global risk conditions remained less confident.

Sterling

Sterling edged lower in early Europe on Wednesday with further reservations that higher tax rates would undermine the economic recovery. There was also speculation that the move to raise taxes would limit the scope for any Bank of England tightening which would sap Sterling support.

GBP/USD dipped to lows near 1.3725 around the US open while EUR/GBP again tested the 0.8600 resistance area.

In testimony to the Treasury Select Committee, Bank of England stated that he believed some tightening of monetary policy would be needed if the economy develops as expected. He also noted that the bank was seeing some short-term levelling off in the recovery and he did not think that inflation will be persistent. In Bailey’s view, minimum conditions for an interest rate increase had been met, but a hike was not warranted at this stage while the committee was split on the issue. Deputy Governor Broadbent added that labour-market pressure on inflation could persist while Ramsden noted that he will be monitoring the inflation data closely.

Sterling gradually recovered against the dollar with EUR/GBP retreating to near 0.8580.

The RICS house-price index eased to 73% for August from 77% as supply remained weak while there was further evidence of a very tight labour market. Sterling stalled on Thursday and GBP/USD traded around 1.3760.

Swiss franc

The Swiss franc remained vulnerable in early Europe on Wednesday with a further lack of support for low-yield currencies. EUR/CHF, however, was unable to break above the 1.0900 level which triggered a limited correction. In contrast, USD/CHF broke above the 0.9200 level.

National Bank member Zurbruegg reiterated that the Swiss franc is highly valued at current levels, maintain the potential for the central bank to intervene in the market to curb currency strength. The franc edged higher on Thursday with EUR/CHF held below 1.0900, although USD/CHF held just above 0.9200.

AUD/USD + USD/CAD

The Australian dollar continued to lose ground in Europe on Wednesday, but AUD/USD found support just below the 0.7350 and recovered to 0.7380 as the US currency faded from its best levels.

Risk conditions remained fragile on Thursday while domestic confidence remained vulnerable and AUD/USD retreated to around 0.7350.

The Bank of Canada held interest rates at 0.25% following the latest policy decision, in line with consensus forecasts.

The bank noted supply-side disruptions which could continue to undermine activity in the short term, although it still expected the disruption to be temporary with higher inflation also expected to be transitory.

There were no changes in bond purchases and no update on the potential timing of a rate increase.

The Canadian dollar initially held steady before retreating sharply. Very choppy conditions persisted with a fresh advance later in the session and USD/CAD dipped sharply from highs above 1.2750 to near 1.2650.

There was further volatile trading on Thursday with USD/CAD around 1.2710.

NOK+ SEK

The Norwegian krone was subjected to choppy trading during Wednesday with EUR/NOK hitting selling interest above 10.30 and settling below this level.

EUR/NOK traded just below 10.30 on Thursday with slightly weaker than expected mainland GDP data with USD/NK around 8.71.

Swedish industrial production increased 1.2% for July with a 13.3% annual increase while orders increased 13.5% over the year. Flash data also reported a 0.5% GDP increase for July.

The krona failed to derive any support from the data with EUR/SEK edging higher in choppy trading.

The pair traded just below 10.20 on Thursday with USD/SEK around 8.63.

Equities

Euro-zone equities lost ground on Wednesday with a significant element of caution ahead of Thursday’s ECB policy decision. There were also reservations over the growth outlook and Wall Street lost ground.

The German DAX index declined 1.5% with Eurostoxx 50 losses held to 1.1%.

Major UK stocks opened sharply lower on Wednesday with further reservations over the implications of tax increases. Growth reservations also sapped support, but energy stocks strengthened later in the session with the FTSE 100 index closing 0.9% lower.

Wall Street stocks opened lower with reservations over the growth outlook and unease over valuations amid supply-side issues. The S&P 500 index losses were held to 0.1% with sharper losses for the Nasdaq index.

US futures retreated on Thursday and there were net losses in Asia amid reservations over global demand conditions.

Japan’s Nikkei 225 index declined 0.6% with a 1.9% slide for the Australian ASX index as the mining sector retreated.

China’s Shanghai index was resilient with a 0.2% gain in late trading despite regulatory concerns, but Hong Kong’s Hang Seng index traded 2.0% lower.

Commodities

The EIA cut its estimate of US production levels for 2021 which provided an element of support for crude on Wednesday.

The dollar also retreated from its best levels and disruption at Libyan ports also provided some support.

Overall, WTI settled above $69.0 p/b with demand reservations capping buying interest.

API data recorded a 2.9mn barrel decline in crude inventories with a sharp 6.4mn barrel decline in gasoline stocks.

WTI held steady around $69.30 p/b on Thursday with Brent around $72.70 p/b.

A firm US dollar continued to sap support for precious metals during Wednesday with further net losses.

Gold dipped to lows below $1,785 per ounce before recovering while silver tested support below $24.00 per ounce.

Gold settled below $1,790 per ounce on Thursday with silver below $24.00 per ounce.

Cryptocurrencies

After the very substantial moves on Tuesday, cryptocurrency volatility eased slightly during Wednesday, although there were still sharp intra-day moves as traders attempted to digest sharp losses.

Bitcoin dipped to lows below $44,500 early in European trading before a quick recovery to above $46,000.

Markets remained jumpy, especially with Coinbase facing a lawsuit from the SEC which maintained concerns over the regulatory environment.

Bitcoin peaked below $47,000 before retreating again and consolidating just above $46,000 on Thursday.

Ether also dipped to lows near $3,220 before a recovery to above $3,500 and consolidating just below this level.

Calendar

Major events for the day ahead: (times in BST)

12.45: ECB policy decision

13.30: ECB press conference

13.30: US jobless claims

15.30: EIA oil inventories data

17.00: Bank of Canada Governor Macklem speech

07.00 (Fri): UK GDP