EUR / USD
The Euro was able to resist further selling after Friday’s European open, but was unable to make significant headway with underlying caution over the Euro-Zone outlook. The dollar was hampered by reports that the Chinese central bank was selling dollars for yuan in the forward market to curb potential selling on the yuan.
ECB President Lagarde stated that the central bank was heading towards more delicate policy decisions moving forward with the bank courageous in taking the decisions needed to bring inflation down to 2%. Markets remain confident that the ECB will raise rates again in June.
Fed Chair Powell reiterated that inflation is far above their objective and that price stability is the foundation of a strong economy.
He also repeated that interest rates may not have to rise as far as otherwise due to the tightening bank credit conditions.
According to Powell further tightening was warranted until recently, but the Fed has come a long way and there is uncertainty over the lagged effects of policy. He added that the Fed has not made any decision whether rates are sufficiently restrictive while the risk of doing too much rather than too little is becoming more balanced.
Markets overall considered that the rhetoric was relatively dovish and suggested that Powell could back a pause at the June meeting, although conviction was lacking.
Futures markets indicated the chances of a June hike had dipped to just below 20% from over 30% on Thursday.
ECB council member Schnabel stated that the bank can do whatever is needed to bring inflation back to the 2% target. She added that wage growth has picked up substantially, increasing concerns surrounding second-round effects. Her rhetoric remained hawkish, but markets expect notable divisions within the central bank.
The US currency dipped after Powell’s comments with the Euro moving back above the 1.0800 level, but it failed to hold highs near 1.0830.
The dollar edged lower on Monday with the Euro just above 1.0810 as markets monitored the debt-ceiling negotiations.
The dollar held a firm tone ahead of Fed Chair Powell’s comments with the dollar peaking around 138.65 against the yen as the 10-year yield moved above the 3.70% level. The dollar dipped following Powell’s comments and the US currency was also unsettled by reports of fresh setbacks in the debt ceiling talks. House Speaker McCarthy stated that there needed to be movement from the White House and there hadn’t yet been any movement.
Treasuries regained support with the 10-year yield moving lower and the dollar dipped to lows below 137.50 before recovering ground.
US yields moved significantly higher on the week and the US currency recovered to near 138.00 at the New York close.
Over the weekend, Minneapolis Fed President Kashkari stated that he was open to a pause in June, but not convinced over a move yet.
China held interest rate unchanged which provided limited yuan support and the dollar settled just below 138.00 after hitting resistance close to this level.
Markets were monitoring debt-ceiling talks closely with President Biden stating that talks with House Speaker McCarthy went well.
There were no significant domestic developments on Friday with Sterling taking some comfort from a relatively positive tone in risk appetite.
After finding support close to 1.2400, Sterling rallied to highs above 1.2480 against the dollar after Fed Chair Powell’s comments but failed to hold intra-day highs.
The Euro was unable to regain the 0.8700 level and settled around 0.8685 as overall Sterling sentiment held steady.
CFTC data recorded a renewed increase in long non-commercial Sterling positions to just over 12,500 contracts in the latest week from 4,500 previously and the largest position since October 2021. The underlying positioning will limit the scope for further Sterling buying.
The UK inflation data will be watched closely this week with expectations that the headline rate will decline sharply.
The Swiss franc posted renewed gains on Friday as it responded to a recovery in gold and fresh uncertainty over US debt talks. There was still an underlying lack of willingness to sell the currency amid reservations surrounding the global growth environment.
The Euro retreated to around 0.9725 with the dollar dipping back below the 0.9000 level. The franc held steady on Monday with the dollar held below 0.9000.