EUR / USD
German retail sales declined 4.4% for April following the sharp 7.7% increase the previous month with the year-on-year increase held at 4.4%. The Euro was unable to make headway in early Europe on Wednesday, especially with some expectations that the ECB would maintain a dovish stance at next week’s policy meeting and push back against any paring of asset purchases. Bank President Lagarde stated that it remained committed to preserving favourable financing conditions.
The dollar continued to gain some respite with the Euro retreating to lows at 1.2165. The US currency was underpinned by speculation that the Federal Reserve could eventually shift towards a less aggressive policy. Near-term dollar liquidity, however, remains extremely high, especially with the Treasury drawing down the cash balance. The very high level of liquidity will tend to undermine the US currency in the short term, especially while yields remain very low. Overall, the dollar was unable to hold its best levels and the Euro recovered to above 1.2200 at the European close.
The Federal Reserve Beige book reported that the economy had grown somewhat faster than in the previous period and that overall price pressures had increased. Production costs had increased rapidly with gradual increases in selling prices amid further supply-chain difficulties. There were also expectations that prices would continue to increase over the next few months. The report maintained concerns over inflation developments, but the dollar struggled to gain more than marginal relief. The Euro settled close to 1.2200 on Thursday with the focus firmly on the jobs data with ADP data on Thursday ahead of Friday’s payrolls report.
The US dollar maintained a firm tone into Wednesday’s New York Open, but it was unable to challenge the 110.00 level against the Japanese currency. There were no major data releases and Treasury yields were little change which stifled further potential US currency support.
Philadelphia Fed President Harker stated that inflation was likely to be close to 3% in 2021 with GDP growth around 7% before moderation next year. Although he expects the FOMC to keep the Fed Funds rate at a very low level for a long time he added that it may be time to at least think about thinking about tapering bond purchases. The Fed did announce that it was winding down the corporate bond-buying programme, which sparked some further speculation over a wider move towards slowing bond purchases, although the corporate buying was a very small part of the overall asset-purchase programme.
The dollar was unable to gain significant support from the Fed rhetoric and drifted towards the 109.50 level against the yen as both currencies struggled for support.
Japan’s PMI services index was confirmed in contraction for May for the 16th successive month as underlying confidence in the economic outlook and yen remained weak. Overall, the dollar edged higher to around 109.75 in early Europe with the Euro around 133.85 as yen sentiment remained fragile.
There was a sharp slowdown in UK mortgage lending for April with a decline to £3.3bn from the record £11.5bn for March, although the number of mortgage approvals increased slightly to near 87,000 from 83,400 previously. There was a further net repayment of £0.4bn for consumer credit while corporates also repaid borrowings. There were sharp distortions with a surge in mortgage borrowing for March followed by a sharp dip in April as the higher thresholds were extended to the end of June.
There was further speculation that underlying strength in the housing market would lead to a more aggressive Bank of England monetary policy within the next few months. Global risk appetite was also firm which helped underpin the UK currency despite underlying caution.
From lows near 1.4110 against the US dollar, Sterling recovered strongly to around 1.4180 at the European close while the Euro found support close to 0.8600.
Prime Minister Johnson reiterated that there was nothing in the data which indicated that the planned June 21st easing of restrictions wouldn’t go ahead which helped underpin sentiment, although there were still calls for a delay. Sterling settled near 1.4150 against the dollar on Thursday with the Euro around 0.8615.
The franc tended to lose ground on Thursday, although there was a significant recovery from intra-day lows. Markets continued to monitor global inflation developments closely given the potential importance for central bank policies and wider asset-price trends.
The Euro found support close to 1.0950, but failed to challenge 1.1000 and settled around 1.0970. The dollar was again unable to hold above the 0.9000 level. The franc was little changed on Thursday with the dollar around 0.8990 as markets continued to monitor central bank rhetoric.