EUR / USD
The Euro edged higher into Wednesday’s New York open, although ranges were relatively narrow. The dollar edged lower after the producer prices data with further expectations that inflation pressures were absent in the industrial sector. The Euro continued to gain ground and pushed to 4-week highs at 1.0865.
The Federal Reserve held interest rates at 5.25% following the latest policy meeting. This was in line with consensus forecasts and the vote was unanimous. According to the statement, the decision to leave rates unchanged at this meeting will give the Fed time to assess additional information and its implications for monetary policy.
The Fed released the latest set of economic projections with most attention on the forecasts for the Fed Funds rate. The end-2023, forecast was raised to 5.6% from 5.1% previously with the end-2024 forecast increased to 4.6% from 4.3%. A majority of committee members expect that rates will be increased again this year.
There was a shift in market expectations following the rate forecasts with rate cuts priced out for 2023 and the dollar posted significant gains.
Fed Chair Powell stated that nearly all policymakers view some further rate hikes this year as appropriate and that the labour market remains very tight. He added that a pause is a continuation of moderating the pace of rate hikes.
He did add that the full effects of tightening had not been seen. He insisted that decisions will be taken on a meeting-by-meeting basis and that July decision had not been made, but the meeting would be live. Powell expects that there will be a big dose of disinflation from the housing sector. He added that the forces that slow inflation are coming into place, but it will take some time. Powell was keen to reiterate that rate cuts were not expected this year.
Powell’s comments added an element of uncertainty and the dollar retreated from initial highs with the Euro recovering after testing the 1.0800 area.
The rhetoric overall, however, was broadly hawkish and the US currency maintained a firmer tone. The Euro settled around 1.0815 on Thursday with markets expecting a further 25 basis-point ECB rate hike at today’s policy meeting. Forward guidance from the ECB will be watched very closely.
US producer prices declined 0.3% for May compared with expectations of a 0.1% decline with the year-on-year rate slowing to 1.1% from 2.3% and below consensus forecasts of 1.5%. Core prices met expectations with a 0.2% monthly increase and the annual increase slowed to 2.8% from 3.1%.
US Treasuries were able to make limited headway after the US producer prices data and lower yields sapped dollar support with a retreat to below the 139.50 level against the yen. Treasuries lost ground in immediate response to the Federal Reserve statement and the dollar also reversed course with a fresh move to test resistance above the 140.00 level. There was some selling above this level into the US close.
The yen, however, was subjected to renewed pressure on Thursday as yield spreads dominated. Chinese data was slightly weaker than expected with industrial production growth held at 3.5% while the retail sales increase was held to 12.7% compared with expectations of 13.7%.
Japanese Cabinet Secretary Matsuno stated that FX stability is important, but the verbal intervention had little impact with the dollar strengthening sharply to 6-month highs around 141.40 against the yen before a slight correction while the Euro strengthened to highs above 152.80.
There was a limited correction in UK gilts on Wednesday with yields edging lower. Sterling, however, maintained a strong underlying tone and posted further net gains in global markets as traders continued to favour carry trades. There were also expectations that the Bank of England would sanction further multiple rate hikes. Sterling strengthened to 1-month highs fractionally below the 1.2700 level against the dollar while the Euro tested support below 0.8550.
Sterling dipped to lows near 1.2625 after the Fed decision before attempting to rally again. There was further interest in buying high-yield assets which helped underpin the UK currency. Sterling settled around 1.2650 on Thursday with the Euro close to 0.8550 and near 9-month lows.
The Swiss franc posted renewed gains on Wednesday despite the underlying interest in carry trades. The Euro retreated to below 0.9750 while the dollar posted lows around 0.8965 ahead of the Fed decision. The dollar moved back above 0.9000 after the Fed decision, before edging lower again.
The franc lost some ground on Thursday with markets focussing on yield spreads and the dollar advanced to 0.9040 with the Euro around 0.9775.