EUR / USD
The Euro was able to maintain a corrective stance in early Europe on Monday with the US dollar also correcting weaker after posting strong gains over the second half of last week. After finding support close to 1.1850, the Euro strengthened to highs around 1.1900 against the US currency.
The Chicago Fed national activity index came in at 0.29 for May and below expectations of 0.70 following a revised 0.09 decline for the previous month.
St Louis Fed President Bullard reiterated that the central bank needs to be ready for upside risks to inflation, although he added that the central bank needs to be ready to react on both sides and stay nimble with central bankers emphasising two-sided risks.
Dallas Fed President stated that the data has been much better than expected and the central bank is responding to that data.
New York Fed President Williams stated that there were risks to both sides of the Fed’s employment and inflation goals and the outlook is still uncertain, although he also noted that there is upside to risks which has been stronger than expected.
Markets will be monitoring US data very closely given the potential impact on Fed policy, although with no major releases due in the short term.
ECB President Lagarde stated that the outlook for the economy is brightening with the potential for stronger consumer demand and a faster than expected increase in consumer demand. She added, however, that policy tightening would be premature and pose a risk to the ongoing recovery.
The dollar was unable to regain ground later in the day and the Euro settled above 1.1900 as commodity currencies also recovered.
The US currency stabilised on Tuesday with the Euro just below 1.1900 as a retreat in the US currency triggered further underlying short covering.
US Treasuries lost ground ahead of Monday’s New York open with bond yields moving higher. The dollar found support below the 110.00 level and strengthened to the 110.20 area as US yields advanced. The dollar was able to hold gains as the yen lost significant ground on the crosses amid strong gains in global equities.
Markets will monitor comments from Fed Chair Powell very closely on Tuesday. In prepared testimony to Congress, Powell stated that the central bank would do everything it can to support the economy for as long as it takes to complete recovery, but also noted that inflation has increased.
US equity futures held firm in Asa on Tuesday and US yields edged higher with Asian bourses also staging a significant recovery. Defensive demand for the yen faded as equities posted gains and the dollar pushed towards 110.50 in early Europe while the Euro traded just below 131.50.
Sterling was able to regain the 1.3800 level against the dollar in early Europe on Monday which helped underpin confidence and there were significant gains ahead of the New York open, especially with the US dollar correcting weaker. Sterling also secured wider support as risk appetite attempted to stabilise with a move to 1.3880 against the dollar while the Euro also retreated as Sterling posted net gains on the major crosses.
Interest rate futures dipped sharply during the day amid speculation that the Bank of England would adjust its interest rate guidance at Thursday’s policy meeting. The increase in yields was a significant factor underpinning Sterling during the day. At the moment, futures markets are pricing in a 30 basis point rate hike by the end of 2022. Equities secured further gains after Wall Street open which also helped underpin the currency.
Sterling pushed above 1.3900 against the dollar with highs around 1.3935 after the European close with the Euro retreating to near 0.8550. Risk conditions held firm on Tuesday, but Sterling was unable to extend gains and traded close to 1.3900 against the dollar as the government borrowing data had little impact.
The Swiss franc continued to edge lower on Monday with overall volatility levels still relatively contained despite sharp swings across other asset classes. The Euro edged above the 1.0950 level before correcting as markets continued to monitor global inflation developments.
Swiss sight deposits increased to CHF712.2bn for the latest week from CHF711bn the previous week which suggested that there had been limited National Bank intervention to restrain the Swiss currency and markets remained wary over intervention to curb currency gains.
The Euro held below 1.0950 after the European close with the dollar dipping to lows around 0.9175 before a recovery to just above 0.9200 on Tuesday.