EUR / USD
The Euro edged higher into Friday’s New York open with a limited correction to highs near 1.0760 as the dollar retreated slightly.
The US PCE prices index increased 0.4% for April with the year-on-year rate increasing to 4.4% from 4.2% and above expectations of 3.9%. The core index increased 0.4% compared with consensus forecasts of 0.3% with the year-on-year rate edging higher to 4.7% from 4.6% and above expectations of 4.6%.
The prices data maintained concerns over sticky inflation pressure in the economy and the threat of further interest rate hikes. In response, the dollar secured fresh support with the Euro dipping towards the 1.0700 level.
Fed Funds futures indicated around a 65% chance that there would be a further interest rate hike at the June policy meeting.
The dollar lost some traction on Monday as defensive demand faded, but Federal Reserve expectations provided robust support with the Euro unable to challenge 1.0750 and retreating towards 1.0700 later in the session. Activity was inevitably curtailed by market holidays in the UK and US.
Markets will be looking at the latest labour-market evidence this week with the employment report due on Friday and job-openings release on Wednesday.
There are also important European inflation readings this week with the German data on Wednesday and Euro-Zone release on Friday.
ECB council member Wunsch stated that the expansive fiscal policy requires a stronger monetary policy reaction, maintaining expectations of further rate hikes.
The dollar dipped in early Asian trading on Tuesday, but regained ground later in the session as yields provided solid underlying support. The Euro also dipped to fresh 2-month lows just below the 1.0700 level. Month-end position adjustment is liable to lead to choppy trading over the next 36 hours.
The dollar broke above the 140.00 level against the yen on Friday which triggered further buying and fresh 6-month highs around 140.70.
Over the weekend, President Biden and House Speaker McCarthy announced that a provisional deal had been agreed to end the debt-ceiling impasse. In return for raising the debt ceiling, The Administration agreed to curb spending. Risk appetite improved after the announcement which limited potential yen demand and, although there were also some reservations that fiscal policy would be slightly tighter, the impact should be limited.
Overall, the dollar peaked at fresh 6-month highs just below the 141.00 level before a correction to lows at 140.20 on Monday.
US markets were closed for a holiday which limited the impact. The dollar dipped to lows just below 140.00 against the yen in early Asia on Tuesday, but there was solid buying on dips, especially as Bank of Japan Governor Ueda maintained a dovish stance and the dollar posted renewed gains to the 140.75 area in early Europe.
Markets will still be monitoring the US debt developments with the focus moving to the congressional votes given some opposition from the left and right.
There was little limited reaction to the Uk retail sales data on Friday with global developments dominating, although higher UK yields did have some positive impact on the currency. Sterling advanced to highs near 1.2400 against the dollar before dipping sharply after the US data with a generally strong dollar and weaker equities sapping UK currency support. The Euro retreated to near 0.8685 as relatively narrow ranges prevailed.
UK markets were closed on Monday with expectations of at least two further Bank of England rate hikes providing net support.
Sterling found support near 1.2330 on Monday and settled just above 1.2350 with more favourable risk conditions providing support.
BRC data recorded an increase in shop prices of 9.0% in the year to May from 8.8% previously and a fresh record high since the survey started in 2005, although food-price inflation eased marginally. Sterling held below 1.2350 against the firm dollar on Tuesday with the Euro around 0.8670.
The Swiss franc has remained resilient in global currency markets despite firmer risk conditions. The Euro dipped to fresh 7-month lows just below 0.9680 on Monday while the dollar was unable to make any headway and settled below the 0.9050 level.
The franc held gains on Tuesday despite a tentative net improvement in risk conditions with the dollar trading below the 0.9050 level.