EUR / USD
The German IFO business confidence index dipped to 91.7 for May from a revised 93.4 the previous month and below consensus forecasts of 93.0. There was a small decline in the current-conditions component and a steeper retreat for the expectations component.
According to the IFO, the economy is heading towards stagflation in the second quarter of the year. It added that the economy is treading water and the strong collapse in industrial expectations is striking. It added that interest rate hikes appear to have dampened demand.
The IFO data triggered another round of Euro selling and it dipped to lows just below 1.0750 against the dollar. There was a recovery towards the 1.0800 area around the US open, but dollar buying quickly resumed, especially with the US currency gaining an element of defensive support as equities moved lower.
The Euro found support at 1.0750 and edged higher to 1.0765 after the Fed minutes. Markets remained wary over the US debt ceiling negotiations. House Speaker McCarthy stated that a deal in principle could be agreed over the weekend, but two ratings agencies warned that there would be an impact on the US credit rating. The dollar maintained a strong tone on Thursday with the Euro dipping to fresh 2-month lows near 1.0730.
The dollar was unable to make headway after the European open and drifted to just below 138.40, although there was still solid buying support on dips. Fed Governor Waller stated that the decision whether or not to raise rates in June will depend on the data releases over the next three weeks. He added that prudent risk management may suggest skipping a June move and lean towards a July hike depending on inflation data and whether credit conditions have tightened excessively.
He added that he does not expect that the data in the next couple of months to make it clear that the terminal interest rate has been reached. He also noted that he did not backing stopping rate hikes unless there is clear evidence that inflation is moving down to the 2% target.
According to minutes from May’s policy meeting, several members stated that further policy firming may not be needed if the economy evolves in line with their expectations. Some participants, however, considered that additional firming would likely be warranted.
Participants also agreed that inflation was unacceptably high and declining slower than expected.
The rhetoric overall suggested the possibility of a pause in June with futures markets indicating just over a 70% chance of no change.
From 6-month highs close to 139.40, the dollar retreated to near 139.00. The dollar secured fresh gains on Thursday with an advance to fresh 6-month highs at 139.70.
Sterling posted further gains after the much higher than expected inflation print for May, especially with an increase in the core rate to 6.8% from 6.2%. There was a fresh shift in Bank of England interest rate expectations with markets considering that there was a 100% chance of a rate hike at the June meeting and there were also expectations that there would be further hikes, potentially to 5.25%. There was also a raft of upward revisions to interest rate forecasts by investment banks.
Sterling was unable to hold the gains amid fears that a more restrictive monetary policy would cause further damage to the economy.
Risk appetite also dipped which sapped potential support for the UK currency in global markets.
The CBI industrial orders index improved slightly to –17 for May from –20 the previous month.
Bank of England Governor Bailey stated that inflation expectations were falling and that companies were sending signals that they intend to slow price increases, but there were risks that inflation would fall only slowly from now on. He added that the key question is how sticky and stubborn inflation proves.
Sterling still retreated to near 1.2330 against the dollar amid a firm US currency with the Euro holding fractionally below the 0.8700 level.
The Swiss franc lost some ground on Wednesday with the currency hampered by expectations of further global central bank rate hikes. The Euro advanced to near 0.9750 at the European close while the dollar advanced to 0.9065.
Markets will monitor US debt-ceiling talks with the potential for some limited franc selling if a deal is reached and the dollar settled around 0.9065 on Thursday.