EUR / USD
The German ZEW economic expectations index retreated to 4.1 for April from 13.0 the previous month and below consensus forecasts of a further net recovery to 15.3. The current conditions component, however, did recover to -32.5 from -46.5 and above market expectations of -40.0.
The dip in expectations will maintain some reservations surrounding the Euro-Zone outlook, although the market impact was limited.
The Euro, however, maintained a firm tone into the New York open with the dollar unable to make headway. There had been some speculation that the dollar had benefitted from capital repatriation ahead of a US tax-payments deadline on April 18th. In this context, there were expectations that these flows would now fade and potentially limited dollar support and supporting the Euro.
The Euro hit highs just above 1.0980, but there was no test of 1.1000 as a lack of fresh market-moving factors created narrow ranges during the day and it settled around 1.0965. Narrow ranges again prevailed on Wednesday with the Euro close to 1.0960.
The latest US jobless claims data will be monitored on Thursday while the Euro-Zone and US PMI releases will also be watched very closely on Friday.
US housing starts were little changed at an annual rate of 1.42mn for March from a revised 1.43mn the previous month and slightly above consensus forecasts of 1.40mn. There was, however, a sharp decline in building permits to 1.41mn from 1.55mn for February.
St Louis Fed president Bullard stated that US recession predictions ignore the strength of labour markets and that interest rates need to increase further given that there has not been much progress on inflation. He added that interest rates in a 5.50-5.75% range would be adequately restrictive.
Atlanta Fed Bostic stated that inflation remains too high, but he was less hawkish that Bullard and he sees one more rate increase with the Fed then on hold to assess the situation. As far as inflation is concerned, the Fed’s Beige Book will be released on Wednesday.
The dollar dipped to lows below 134.00 after the building permits data, but Treasuries failed to hold their best levels and the dollar edged back above 134.00 as the 10-year yield moved back towards 3.60% and provided underlying dollar support.
Japan’s monthly Tankan index remained at –3 for April, but companies do expect a rebound next month while there was a further improvement in the non-manufacturing sector. Narrow ranges prevailed in Asia with the dollar securing a net advance to just above 134.50 against the yen.
Sterling posted gains after Tuesday’s European open with further support from the latest UK data. The labour-market data overall was mixed, but the stronger than expected data on wages reinforced expectations that the Bank of England would have to be more aggressive in raising interest rates to curb inflation.
Chancellor Hunt appointed new advisers to his economic council including former Bank of England chief economist Haldane.
Sterling posted highs at 1.2450 against the dollar before settling around 1.2425. Risk conditions were broadly stable which contributed to generally narrow ranges during the day as markets waited for further evidence on the domestic and global outlook with the Euro little changed.
The headline UK inflation declined to 10.1% for March from 10.4% previously, but this was significantly above expectations of 9.8%. The core rate was unchanged at 6.2% and above expectations of 6.0%. The failure to dip below 10.0% will increase concerns over higher inflation expectations and there will also be expectations that the Bank of England will have to maintain a hawkish policy stance. Sterling strengthened slightly to around 1.2430 against the dollar with the Euro around 0.8820
Comments from Bank of England officials will be watched closely to see whether there is any change in stance.
The Swiss franc lost some ground on Tuesday, although relatively narrow ranges prevailed with markets continuing to assess the relative monetary policy stances across major central banks. Equity markets held a firm tone during the day which limited potential franc support on defensive grounds. The Euro advanced to 0.9840 against the franc while the dollar edged lower to 0.8975. There was little change on Wednesday as wider trading ranges remained narrow.