EUR / USD
Relatively tight ranges prevailed ahead of Wednesday’s New York open with inevitable caution ahead of the US inflation data. The dollar edged higher with a covering of short positions and the Euro retreated towards the 1.2115 area. Recovery expectations provided some underlying Euro support.
The EU Commission increased the Euro-zone 2021 GDP growth forecasts to 4.3% from 3.8% previously and the 2022 outlook was also upgraded. The Commission expects a significant easing of coronavirus restrictions during the second half and the EU also announced that budget rules would be suspended until the end of 2022.
US consumer prices increased 0.8% for April which was substantially above consensus forecasts of 0.2% and the strongest monthly increase since August 2008. The year-on-year increase jumped to 4.2% from 2.6%, also well above market expectations of 3.6% and the highest reading since October 2008.
Underlying prices increased 0.9% on the month compared consensus forecasts of 0.3% with the year-on-year rate at 3.0% from 1.6%. This was the highest core reading since the beginning of 1996. There was a sharp increase in energy services prices on the month and there was a 10% surge in the price of second-hand vehicles to give a 21% annual increase. There were also strong price increases in commodities on the month.
The dollar jumped higher on the data with the Euro dipping to lows near 1.2075. The dollar quickly retraced gains, but regained traction later in the session, especially with sharp losses for commodity currencies and the Euro retreated to 1.2070. Markets attempted to stabilise on Thursday with the Euro around 1.2080. Inflation developments will remain a key element in the short term with the producer prices data due later in the day.
JPY
US Treasuries dipped sharply in an immediate reaction to the much higher than expected US inflation data. The 10-year bond yield strengthened to 1.65%, but there was a quick reversal and the dollar strengthened to highs around 109.20 before also fading as volatility increased sharply.
Fed Vice-Chair Clarida stated that inflation was likely to increase further in the short term before moderating later in the year. He reiterated that the inflation rise above 2.0% is due to transitory factors. There was, however, a slight shift with comments that he would take it very seriously if longer-term inflation expectations started to move higher. He also noted that the Fed does not have infinite tolerance for inflation. Markets indicated an 80% chance of a rate increase before the end of next year. Bond yields moved sharply higher again towards the European close and the dollar strengthened to around 109.40. The dollar maintained a stronger tone into the New York close as yields remained higher with a peak around 109.80. Bank of Japan Governor Kuroda stated that the bank is prepared to extend pandemic relief beyond September if needed. Risk conditions attempted to stabilise, curbing potential yen demand on safe-haven grounds, and the dollar was held around 109.75.
GBP
Overall confidence in the UK recovery outlook was sustained following the batch of data releases. The growth data did not dampen expectations of a strong recovery in the economy while the trade data and a net recovery in EU exports also lessened the immediate risk of selling on the grounds of Brexit concerns.
In this environment, Sterling was able to maintain a firm underlying tone. The UK FTSE index also out-performed in global terms which underpinned the UK currency.
Sterling did retreat against the dollar following the US inflation data, but the Euro retreated to 1-month lows. The UK currency was undermined by higher US yields and weaker equities. The UK currency dipped to near 1.4050 against the dollar while the Euro recovered to 0.8590.
Bank of England chief economist Haldane maintained a hawkish stance on the outlook for growth and inflation and continued to back a reduction in asset purchases, although he will leave the bank next month. The RICS house-price index strengthened to 75% from 59% previously and the highest reading for 40 years. Sterling sentiment held firm on recovery expectations and it traded around 1.4050 against the dollar with the Euro around 0.8600
CHF
The Swiss currency was unable to make headway during Wednesday despite the stronger than expected reading for US inflation. Markets continued to monitor global inflation trends closely, especially given the franc’s long-term credentials of holding value.
The Euro was unable to make an attack on the 1.1000 area and settled little changed around 1.0970 while the dollar posted net gains to 0.9080.
The franc did not secure notable support from weaker risk conditions with the Euro around 1.0975 and the US currency around 0.9085.
