Gas Unsettles The Markets

GBP

Sterling continues to grind higher against the euro and has gained nearly one Eurocent since last Friday. It is now approaching its highest level against the single currency this year. Sterling is becoming more attractive against the euro as yields on UK government bonds continue to climb.

Despite the upbeat tone of Boris Johnson's conference speech yesterday, investors remain concerned over the inflationary impact of the sharp rise in wholesale gas. As the gas price rises, so do yields and sterling rallies.

EUR

The euro is not only falling against sterling, but it is also suffering against the dollar. The market is understandably nervous over European gas prices as imports from Russia make up a fair proportion of their supply. Despite Vladimir Putin expressing concern over Europe's plight, traders are cynical over the amount of effort he will expend to solve the problem as high prices benefit him economically and politically.

The euro was also dented by disappointing Retail Sales figures yesterday and after this morning's sharp fall in German Industrial Production is unlikely to recover too much ground. Further light on how policymakers think will come from the minutes from the ECB's last meeting published today and a plethora of speakers, including Isabel Schnabel and Phillip Lane.

USD

The dollar had a roller-coaster day yesterday, rising initially as US stock markets fell before giving back some of their gains as risk sentiment improved. The horse-trading over raising the US debt ceiling and the uncertainty surrounding its resolution will carry on casting a shadow over the markets until it is resolved.

The ADP white-collar jobs report was much better than analysts forecast and were at the best level for three months, reporting 568,000 new jobs. Analysts are now expecting a strong figure from Friday's Non-Farm payroll data, which traders believe would lead to an announcement of policy tightening at the Federal Reserve's next meeting. Further clues to tomorrow's employment number may come this afternoon in the shape of the weekly jobless report.