EUR / USD
Relatively tight ranges again prevailed in early Europe on Tuesday with the Euro initially strengthening towards 1.2150 before a fresh retreat to near 1.2100 as the US dollar advanced. EU Commission President von der Leyen stated that the EU and US had resolved the dispute over aircraft subsidies which had a mixed impact.
US retail sales declined 1.3% for May, weaker than consensus forecasts of a 0.9% decline, although the April figure was revised to show an increase of 0.9%. Underlying sales declined 0.7% and the control group recorded a 0.7% decline after a 0.4% dip previously as consumers switched to stronger buying of services.
Producer prices increased 0.8% for May, above consensus forecasts of 0.6% with a year-on-year increase of 6.6% from 6.2% previously. Core prices increased 4.8% over the year from 4.1% previously and in line with expectations. There were further concerns that higher energy costs would put upward pressure on prices.
The New York Empire manufacturing index declined to 17.4 for June from 24.3 the previous month and below consensus forecasts of 23.0. There was also a sharp slowdown in the rate of growth for new orders, production and unfilled orders. Employment growth slowed on the month while price pressures remained elevated, with only a slight slowdown in prices paid from record highs posted last month.
The inflation and business confidence data did not trigger a significant shift in the narrative surrounding the US outlook with further debate whether inflation pressures are transitory. The dollar was unable to gain any traction later in the day and retreated slightly from 1-month highs while the Euro settled around 1.2125 at the New York close. Markets remained focussed on Wednesday’s Federal Reserve policy statement and the dollar was fractionally lower on Wednesday with the Euro around 1.2125. Any rhetoric on tapering asset purchases will be watched closely while the latest forecasts from committee members could bring forward the first rate hike to 2023.
US bond yields edged higher after the US inflation data with the 10-year rate just above 1.50% which helped underpin the dollar as it held above the 110.00 level.
The US NAHB housing index edged lower to 81 from 83 previously while industrial production posted a 0.8% increase for May. The yen secured some respite on the crosses with the dollar held just above 110.00. Net long-term capital inflows declined to $101bn for April from $262bn the previous month.
Japan’s core machinery orders increased 0.6% for April after a 3.7% gain previously while exports were unchanged for May and slightly below expectations, although with a year-on-year increase of 49.6% given the slump in Japanese and global trade last year.
The latest raft of Chinese data will be released after the European open with commentary on the yuan also watched closely. The dollar held just above the 110.00 as narrow ranges prevailed with the Euro close to 133.50 as underlying yen sentiment remained fragile.
Sterling briefly strengthened after the UK labour-market data, but quickly reversed course to trade slightly lower. Although there was optimism that a stronger rate of wages growth indicated a tight labour market and potential for increased consumer spending, there was still a high degree of uncertainty over underlying trends, especially with a substantial number of workers still on furlough. There was scepticism that the Bank of England would move to any near-term policy tightening.
Markets continued to monitor coronavirus developments and the potential impact of delaying further re-opening measures. Sterling dipped to one-month lows below 1.4050 against the dollar ahead of the New York open, but did find support on dips and recovered ground after the Wall Street open.
Overall risk appetite held steady on Tuesday which curbed potential Sterling selling, but it was held below 1.4100 against the dollar while the Euro traded above 0.8600 at the New York close. The CPI inflation rate increased to 2.1% for May from 1.5% previously and above consensus forecasts of 1.8%. The core rate also increased to 2.0% from 1.3% previously. Sterling edged higher after the data, although the overall reaction was muted as it traded just below 1.4100 against the dollar.
The Swiss franc was resilient on Tuesday as markets continued to focus on the global inflation and monetary policy debate. The National Bank will announce its latest decision on Thursday with no policy changes expected, but the statement and rhetoric from officials will be monitored closely.
The Euro settled just below the 1.0900 level while the dollar failed to hold above 0.9000. Narrow ranges prevailed on Wednesday ahead of central bank decisions over the next 24 hours with the dollar held below the 0.9000 level as US bond yields were unable to make headway.