EUR / USD
German bond yields continued to move higher after Wednesday’s European open with 10-year yields at a fresh 2-year high which provided some Euro support. The dollar did, however, gain an element of support from weaker risk conditions, especially given the significant retreat in commodity prices. There was an element of caution ahead of the Federal Reserve minutes in case there was a more hawkish policy tone and the Euro dipped below 1.2200 at the US open.
St Louis Fed President Bullard stated that inflation would remain above 2% in 2022, but he also considered that this would be consistent with the policy framework. He added that the labour market was tighter than it appeared and that the Fed would have to tolerate higher inflation during the current boom time.
Minutes from May’s Federal Reserve meeting stated that there was still a long way to go to meet the central bank’s goals and that it would likely take some considerable time before significant change is made. The minutes also reiterated that inflation pressures were likely to be transitory while bottlenecks would hold back output in the near term. A number of members stated that a discussion of tapering might be appropriate at some point in upcoming meetings if the economy continues to make rapid progress towards the committee’s goals. The language on tapering was still relatively dovish, but slightly stronger than had been expected on the tapering issue and the dollar posted net gains with the Euro again dipping back below the 1.2200 level against the US currency.
Euro-zone business confidence data will be watched closely on Thursday to assess underlying recovery conditions. The dollar was unable to extend gains on Thursday and the Euro traded around 1.2185 as commodity currencies also stabilised which limited further US dollar support.
US equities continued to lose ground ahead of the Wall Street open with losses of over 1.0% for the S&P 500 index. Global markets also lost traction amid a slide in cryptocurrencies which provided an element of yen protection and the dollar was held below the 109.00 level, although overall ranges remained narrow.
Bond yields moved higher following the Federal Reserve minutes with the 10-year yield around 1.68% and the dollar moved back above the 109.00 level.
Japan’s Tankan manufacturing index strengthened to 21 for May from 13 the previous month and the strongest reading since December 2018 and the services sector also posted the first positive reading since early 2020 with further gains expected in the months ahead. Japanese exports also posted a 38% increase in the year to April from 16.1% previously, although shipments were notably weak last year and uncertainty over the outlook continued.
Risk conditions overall stabilised during the Asian session with the dollar around 109.15 as both currencies lacked strong support and the Euro close to 133.0.
Reaction to the UK inflation data remained measured with the release close to market expectations and not having a sustained impact on Bank of England policy at this stage. Global risk conditions were more fragile as overall volatility increased which had a significant impact in undermining Sterling support with a retreat to below 1.4150 against the dollar while the Euro edged higher to 0.8630 as international influences dominated.
Markets were also continuing to UK coronavirus developments and there were increased expectations that the relative Euro-zone performance would improve.
Sterling edged lower during the day, although it was broadly resilient given that risk conditions were significantly weaker during the day.
There was slightly increased optimism that vaccines would be effective against the Indian variant and hopes that the transmission rate was lower than feared.
Sterling dipped to lows near 1.4100 following the Fed minutes with the Euro around 0.8630. There were media reports that the government was more confident that the ending of coronavirus restrictions would go ahead as planned on June 21st which helped curb any potential selling pressure on Sterling. The UK currency traded above 1.4100 against the dollar in early Europe on Thursday with the Euro around 0.8630 ahead of the latest UK business confidence data.
The Swiss currency lost ground ahead of Wednesday’s New York open with the Euro moving above the 1.1000 level for the first time in two weeks. There were expectations of a stronger Euro-zone performance which limited potential support for the Swiss currency. The franc was also unable to secure significant support from a weaker tone in equity markets. The dollar managed to regain the 0.9000 level and there was some support from gains in precious metals early in New York.
The Euro settled just above 1.1000 against the franc on Thursday with the dollar around 0.9040 as overall market volatility eased slightly.