EUR / USD
The German ZEW economic confidence index edged higher to –8.5 for June from –9.4 previously and slightly stronger than expectations of –11.9.
The Euro held a firm tone ahead of Tuesday’s New York open and nudged above the 1.0800 level against the dollar.
US consumer prices increased 0.1% for May compared with consensus forecasts of 0.2% and the year-on-year rate declined sharply to 4.0% from 4.9%. This was slightly below market expectations of 4.1% and the lowest reading for just over two years.
Food prices increased 0.2% on the month with an annual increase of 6.7%. Energy prices declined 3.6% on the month with an annual decline of 11.7%.
Core prices increased 0.4% on the month which was in line with consensus forecasts and the annual increase also met expectations at 5.4%. There was the second successive monthly increase of over 4.0% for used vehicle prices which pushed the rate higher.
The dollar lost some ground in immediate reaction to the headline data, but was resilient with a recovery from 3-week lows as US yields moved higher and the Euro settled just below 1.0800 from highs above 1.0820.
The Federal Reserve will announce its latest policy decision on Wednesday with expectations that the central bank will leave rates at 5.25%. The statement and press conference will be very important and the central bank will also release the latest ‘dot plot’ forecasts of Fed Funds rates by committee members.
Markets expect that the overall rhetoric will be relatively hawkish, but there will be a big market reaction if there are suggestions that rates have peaked.
The Euro settled just below the 1.0800 level on Wednesday as markets waited for the Fed decision and guidance with the ECB policy decision on Thursday.
Chinese new loans increased CNY1,360bn for May from CNY719bn the previous month, but below expectations of CNY1,600bn. The total social financing also fell short of expectations at CNY1,560bn for the month. The dollar was unable to gain any traction into the US open.
Treasuries posted gains after the US inflation data with the 10-year yield dipping to just below the 3.70% level.
The dollar briefly spiked after the US data before losing ground and testing the 139.00 level against the Japanese currency.
There was a net shift in Fed Funds rate pricing with the chances of a rate hike at Wednesday’s meeting cut to below 10% and this move did not lead to any protest from the Fed. The chances of an increase in July were also cut slightly to around 65%.
Equity markets posted gains and overall market volatility remained lower which undermined the yen, especially with strong interest in carry trades. The dollar posted gains to above 140.00 against the yen with highs at 140.30 while the Euro strengthened to 151.35.
The Chinese yuan retreated to 6-month lows after the domestic rate cuts which also hampered the yen and the US currency settled above 140.00 in early Europe.
Sterling maintained a firm tone after the latest labour-market data with expectations that the stronger than expected wages data would force the Bank of Egland to be more aggressive in raising interest rates with markets now pricing in five further rate hikes. UK 2-year gilt yields also increased to a 15-year high which underpinned the UK currency. There were, however, some reservations that the further rate hikes would undermine the economy, especially given the impact on mortgage rates.
Bank of England Governor Bailey stated that the latest jobs data shows a very tight labour market and that inflation had been slower to fall than the central bank had hoped. MPC member Dhingra stated that inflation is still far too high relative to the target and that monetary policy is likely to be slow to take effect. There were no specific comments on interest rates, although the overall rhetoric suggested that she might be less dovish than previously.
Sterling posted 1-month highs around 1.2620 and traded just above 1.2600 on Wednesday while the Euro retreated to near 0.8550 and close to 8-month lows.
The Swiss franc struggled to regain ground on Tuesday with firm risk conditions sapping potential support. The Euro tested the 0.9800 area before drifting lower while the dollar posted limited net losses. The interest in carry trades had some impact in curbing potential support for the Swiss currency.
The franc edged higher on Wednesday with the Euro around 0.9765 and the dollar close to 0.9050.