EUR / USD
ECB President Lagarde stated that the bank will have to pursue higher rates and that the peak is not known yet which failed to provide further Euro support on Thursday.
Euro-Zone consumer prices increased 0.8% for February with the headline inflation rate declining to 8.5% from 8.6%, but this was significantly above consensus forecasts of 8.2%. The underlying inflation rate increased to a record high of 5.6% from 5.3% and above market expectations of 5.3%.
The stronger than expected inflation rate reinforced expectations that the ECB would have to maintain a hawkish stance and engage in further significant interest rate hikes with a potential terminal rate of 4.00%. ECB minutes from January make a reference to the council needing to be careful with communication as rates increased.
The Euro was unable to gain support from the data and drifted lower into the New York open as the dollar regained support amid a more defensive risk tone.
US initial jobless claims declined slightly to 190,000 in the latest week from 192,000 previously and slightly below consensus forecasts of 195,000 while continuing claims were unchanged at 1.66mn in the latest week which suggested that the labour market remained robust.
The dollar gained further support after the US open with the Euro dipping to near 1.0580 and struggling to regain any territory as the dollar held a firm tone
The Euro managed to recover to just above 1.0600 on Friday and traded around 1.0620 as Chinese data remained positive and the dollar edged lower.
Revised data on unit labour costs recorded a 3.2% increase for the fourth quarter of 2022 with a 6.3% annual increase in costs. The increase in labour costs was much higher than for the original estimate which has recorded an increase of 1.1% and annual increase of 4.5%.
The higher rate of increase in labour costs reinforced fears that the Federal Reserve would have to tighten policy further to bring inflation under control.
Treasuries came under pressure with the 10-year yield hitting a fresh 3-month peak at 4.08% with the 2-year yield close to 5.00%.
The dollar posted highs just above the 137.00 level before fading as Treasuries looked to regain some ground.
Fed Governor Collins stated that further interest rate increases will be needed, but that the number of hikes will be determined by incoming data.
Fed Governor Waller stated that the central bank may need to raise rates beyond the December 5.1-5.4% view and that progress on inflation had been slower than expected, although he added that there some reasons for hope with a sharp deceleration in rent increases. Equities were resilient despite the hawkish overall rhetoric.
Tokyo’s inflation rate dipped sharply to 3.4% for February from 4.4% previously, although the core rate edged higher to 3.2% from 3.0%.
China’s data remained more positive with the Caixin PMI index rebounding to 55.0 for February from 52.9 and above consensus forecasts of 54.3.
There was further choppy yen trading with the dollar edging below 136.50 in early Europe while the Euro traded below 145.00.
The ONS reported that job adverts declined in late February with the overall total declining 23% from the previous year. The latest Bank of England survey reported that businesses are planning to increase prices 5.4% over the next 12 months from 5.8% previously and the lowest reading since February 2022. Planned wage increase remained unchanged at 5.7% and equalling 6-month lows. The data indicated that labour-market pressures could be starting to ease slightly.
According to Bank of England chief economist Pill, the evidence suggests that the economy has been slightly stronger than forecasted and the pace of wage settlements was also slightly stronger than expected, but he also commented that some high-frequency indicators of wages had fallen quite sharply recently.
The commentary was not especially hawkish and failed to support Sterling with the currency overall continuing to lose traction. The UK currency dipped to lows at 1.1925 against the dollar while the Euro consolidated around 0.8870. There was a more positive tone on Friday with fresh optimism over the Chinese outlook and expectations that energy-support measures would be increased for the second quarter. The Pound recovered to 1.1975 on Friday with the Euro edging lower to 0.8865.
The Swiss franc initially remained under pressure on Thursday, but then regained ground as global bond yields retreated from highs. The Euro hit highs just above 1.0040 before dipping back below parity while the dollar settled around 0.9430. There was little change on Friday with the dollar edging back to just below 0.9400 as wider dollar moves dominated. Markets will remain on alert for National Bank rhetoric ahead of the March policy meeting.