EUR / USD
The ECB increased interest rates by 25 basis points following the latest policy meeting which was in line with consensus forecasts as the refi rate was increased to 4.00%. The ECB raised the inflation forecasts with the underlying rates now forecast at 5.1%, 3.0% and 2.3% respectively for 2023, 2024 and 2025, all above target.
There was a slight downgrading of GDP growth forecasts. The bank stated that rates will be brought to sufficiently restrictive levels.
In an immediate response, the Euro edged higher with a move to just above 1.0850 against the dollar.
According to Bank President Lagarde, Indicators of underlying price pressures remain strong, although some show tentative signs of softening.
She stated that longer-term inflation expectations need monitoring and that recent wage deals added to upside inflation risks.
Lagarde also stated that further interest rate increases were needed with another hike in July. Subsequent source reports from the ECB suggested that a further rate hike in September was also possible. The hawkish rhetoric underpinned the Euro in global markets.
There was also further speculation that the Chinese authorities would sanction a substantial economic stimulus package which boosted risk appetite and also underpinned the single currency. The dollar overall lost significant ground, especially with mixed data. The Euro strengthened to 1-month highs just above the 1.0950 level. There was a consolidation phase on Friday with the Euro just below 1.0950 as markets considered the central bank policy stances.
JPY
The dollar tested the 141.50 level after Thursday’s New York open. US retail sales increased 0.3% for May after a 0.4% increase the previous month and stronger than consensus forecasts of a marginal decline. Underlying sales increased 0.1% which met market expectations while the control group recorded a 0.2% increase. Initial jobless claims were unchanged at 262,000 in the latest week and above consensus forecasts of 250,000 while continuing claims increased to 1.78mn from 1.76mn.
The New York Empire manufacturing index recovered very sharply to 6.6 for June from –31.8 previously and well above consensus forecasts of –16. New orders and shipments also rebounded strongly into positive territory, but unfilled orders continued to decline. There was a slight employment decline for the month while there was a notable easing of price pressures on the month. Companies were more confident over the outlook, but expect pricing pressures to ease further.
The Philly Fed manufacturing index edged lower to –13.7 from –10.4 previously and close to consensus forecasts. Shipments increased on the month, but new and unfilled orders declined. Employment declined slightly while inflation pressures were subdued and price pressures are expected to ease slightly further.
Treasuries posted gains after the batch of US data with US yields moving lower and this sapped dollar support. The yen, however, was sold on the major crosses with further yen selling on the crosses and the dollar was able to find support just below the 140.00 level.
The Bank of Japan made no changes to policy, in line with consensus forecasts. There was no evidence of verbal intervention by the Finance Ministry.
Overall yield spreads continued to undermine the yen with the dollar advancing to around 140.70 while the Euro hit 15-year highs near 154.00.
GBP
There were no significant UK developments during Thursday with markets monitoring US yields closely. Sterling found support below 1.2650 against the dollar and edged higher while the Euro recovered ground. There are strong expectations that the Bank of England will hike rates again next week.
Risk appetite strengthened during the session, especially with expectations that China would announce a fresh stimulus package. In this environment, the UK currency gained fresh support with 13-month highs just above 1.2790. The Euro posted a net advance to 0.8570, but was held well below intra-day highs.
Sterling held a firm tone on Friday as risk appetite held steady and it traded around 1.2780 against the dollar with the Euro around 0.8560.
CHF
The Euro secured a limited advance following the ECB policy meeting. The franc, however, fought back later in the session despite stronger risk appetite and gains in equities. The Euro settled little changed. The dollar was unable to make headway and broke support around the 0.9000 level with sharp losses to 0.8920.
The dollar remained under pressure just above 0.8920 on Friday with the franc remaining resilient despite further interest in carry trades.
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