EUR / USD
The Euro-zone PMI manufacturing index was revised significantly higher to 60.5 in the June final reading from the flash reading of 59.5 with solid gains across all countries. ECB President Lagarde stated that an improved economic scenario had reduced the probability of severe scenarios, but the nascent recovery still faces uncertainty due to mutations. Markets continued to expect that the ECB would maintain a loose monetary policy.
After finding support just below 1.1850, the Euro was able to secure a limited recovery into the New York open with a limited dollar correction.
US initial jobless claims declined to a 15-month low of 364,000 in the latest week from a revised 415,000 previously and below consensus forecasts of 390,000. Continuing claims increased to 3.47mn from 3.41mn previously with a small net decline in pandemic claims while layoffs declined sharply for May.
The ISM manufacturing index retreated to 60.6 for June from 61.2 previously and slightly below consensus forecasts. There was also a slight slowdown in new orders growth while production increased at a faster pace. There were further supply difficulties, although the rate of deterioration slowed slightly. The survey also recorded a marginal decline in employment, but there was a further strengthening in the prices component. The index registered the sixth successive reading above 80 and the fastest overall rate of price increases since 1979 as 85% of companies reported having to pay higher prices.
There was an initial mixed reaction to the data, but the dollar gained ground as markets focussed on the inflation component and supply difficulties.
Philadelphia Fed President Harker stated that he expects an inflation rate of 3-3.5% this before a retreat to around 2% next year. He added that higher than inflation late this year could have an impact on the rate outlook and he also called for a tapering of bond purchases sooner rather than later with a start to the process this year.
The dollar secured further net gains after the European close with the Euro back below 1.1850 and held just below this level on Friday ahead of the US jobs data.
Yen sentiment remained weak ahead of Thursday’s New York open with the dollar posting 15-month highs against the yen. US Treasuries were mixed after the ISM manufacturing data, but the 10-year yield was held below 1.50%. The dollar maintained a firm underlying tone and advanced to highs around 111.60.
Wall Street equities posted further gains later in New York and the dollar stabilised around this level later in the US session.
There will be further market volatility following the latest US jobs data, especially if there is a substantial deviation from consensus forecasts, and long-term implications could also be important. As well as the headline payrolls data, the components of the wage will be important for longer-term inflation expectations. Markets will also be monitoring any comments from Federal Reserve officials following the data. Narrow ranges prevailed on Friday with the Chinese yuan drifting weaker while Asian equity markets were mixed. The dollar held above 110.50 against the yen at the European open while the Euro held just above the 132.0 level.
The final June UK PMI manufacturing index was revised slightly lower to 63.9 from the flash reading of 64.2. In his Mansion House speech on Thursday, Bank of England Governor Bailey admitted that inflation would increase further in the short term, but also reiterated his confidence that the increase would be transitory with a rebalancing of growth in the economy and an increase in supply helping to curb inflation pressures. He also warned over the dangers of overreacting to the higher inflation data. He did insist that the bank would be vigilant and take action if there was sustained upward pressure on inflation. The lack of hawkish rhetoric triggered Sterling selling with lows around 1.3765 against the dollar as the Euro strengthened to above 0.8600.
Sterling recovered ground later in the session with net support against low-yield currencies. There was, however, a retreat to 10-week lows near 1.3750 later in the day as the US dollar gained fresh ground and the Euro also held above 0.8600. There was little change on Friday ahead of the US jobs data with Sterling around 1.3760.
Swiss consumer prices increased 0.1% for June with the year-on-year rate unchanged at 0.6% and slightly below consensus forecasts of 0.7%. The June PMI manufacturing index declined to 66.7 from 69.9 previously, although this was still a historically robust figure.
The Swiss franc overall continued to edge weaker during the day with underlying selling interest in very low yield currencies. The yen also lost ground and the Euro secured a net advance to 1.0970. The dollar hit highs of 0.9270 before fading, although it held above 0.9250 on Friday.