EUR / USD
The Euro posted significant gains after Monday’s European open and advanced to highs just above the 1.0790 against the dollar. This was marginally above Friday’s high, but there was no challenge on the 1.0800 level and the dollar recovered some ground into US trading.
Moves in yields were the primary influence with the Euro retreating to the 1.0750 area as US yields edged higher.
There are still strong expectations that the ECB will hike rates by 25 basis points at this week’s policy meeting.
Overall volatility remained subdued during the day with the Euro resisting further selling pressure later in the session.
The latest US consumer prices inflation data will be released on Tuesday. Consensus forecasts are for prices to increase 0.2% on the month with the year-on-year rate declining sharply to 4.1% from 4.9% due to a favourable base effect. Underlying prices are expected to increase 0.4% with a small decline in the annual rate to 5.3% from 5.5%. A stronger than expected reading for the data would increase pressure on the Fed to raise rates again.
The Euro bounced again in Asia on Tuesday and traded around 1.0795 against the US currency with support on the crosses.
US Treasuries posted gains after Monday’s European open which dampened dollar support, but there was support above the 139.00 level against the yen.
Treasuries lost ground after the US open with markets fretting in part over very high issuance and the dollar moved significantly higher with a move above 139.50.
The latest New York survey recorded that 1-year inflation expectations declined to 4.1% from 4.4% previously and the lowest reading since May 2021, although the three and five-year expectations increased marginally on the month. The decline in short-term expectations provided some relief.
Fed Funds futures indicated just below a 20% chance that the central bank would increase rates at this week’s policy meeting.
Expectations are that the Bank of Japan will leave monetary policy on hold at this week’s policy meeting, but with some reservations that there could be an adjustment in guidance which curbed yen selling to some extent. The dollar settled close to 139.50 in early Europe on Tuesday ahead of the inflation data.
The Pound was able to make renewed gains after Monday’s European open and challenged the 1.2600 level against the US currency.
Sterling gained support from a further increase in yields with the 2-year yield hitting fresh 8-month highs above 4.55%.
There were further expectations that the Bank of England would increase rates multiple times over the next few months with a peak around 5.50%.
In comments on Monday, Bank of England MPC member Haskel stated that further policy tightening cannot be ruled out. He added that the bank is monitoring indicators of inflation momentum and persistence closely and that policy should lean against the risk of inflation.
Fellow MPC member Mann stated that UK data and surveys have remained positive since May’s central bank forecasts. She added that wage increases of 4% would make it a challenge to reduce inflation to the 2% target and she also questioned how tight financial conditions are.
Sterling still lost substantial ground later in the day with a corrective retreat to near 1.2500 against the dollar while the Euro recovered strongly to just above 0.8600.
The latest UK labour-market data was stronger than expected with a decline in the unemployment rate and net increase in employment. The wages data recorded a headline annual increase of 7.2% from 6.8% previously. The data reinforced expectations of a hawkish Bank of England stance with the Pound above 1.2550 against the dollar while the Euro retreated to just below 0.8600.
Total Swiss sight deposits declined to CHF509.8bn in the latest week from CHF519.0bn previously. The data resumed the trend of declining deposits and the lowest level since July 2016 with the National bank happy to see a net tightening of liquidity as the previous surge in deposits due to quantitative easing is unwound.
Despite tighter financial conditions, the Swiss franc lost significant ground during the day with the Euro strengthening to 0.9765 and the dollar securing a net gain to above 0.9080 as yield spreads dominated. The dollar was unable to challenge 0.9100 and settled around 0.9055 on Tuesday with the Euro edging higher to 0.9780.