EUR / USD
The German ZEW economic expectations index declined to 63.3 for July from 79.8 previously and below consensus forecasts of 75.2. The current conditions component, however, strengthened to 21.9 from -0.1 the previous month and above market expectations of 5.0. The Euro-zone expectations index retreated to 61.2 from 81.3 previously and the data overall sapped confidence in the outlook with a retreat in equities.
Euro-zone retail sales increased 4.6% in May with a 9.0% annual increase. After a firm tone in Asia, the Euro was unable to make further headway and there was a sharp reversal soon after the European open with a rapid retreat towards the 1.1850 area as the dollar secured fresh support.
The US PMI services-sector index was revised marginally lower to 64.6 for the final June reading from 64.8 previously.
The ISM non-manufacturing index declined to 60.1 for June from 64.0 previously and below consensus forecasts of 63.4. There was a notable slowdown in the rate of growth in new orders and business activity growth also slowed. The employment component dipped into contraction territory for the month after five successive increases which triggered unease, while the rate of price increases slowed marginally from the previous month, although remained close to record highs.
The dollar maintained a firm tone after the data with a weaker tone surrounding risk conditions while commodity currencies also reversed sharply. As selling in commodity currencies gathered pace, the US currency secured further gains with the Euro retreating to near 1.1800 and close to 3-month lows. German industrial production declined 0.3% for May which provided some relief after the slide in orders. The dollar maintained a firm tone in Europe, but the Euro edged higher to 1.1825.
The dollar was unable to make any headway ahead of the New York open on Tuesday and was held below 111.00 against the yen. Treasuries posted significant gains following the US data releases with the 10-year yield dipping to 2-week lows around 1.37%. Lower yields undermined the dollar and there was a significant retreat in equity markets which provided an element of yen support. In this environment, the dollar retreated to lows near 110.50 against the Japanese currency. There was an element of stabilisation in equities later in New York, but the dollar secured only limited respite. Markets will monitor the Federal Reserve minutes closely on Wednesday for further evidence on potential Fed tightening plans with commentary on conditions for a tapering of bond purchases watched closely.
China’s economic daily issued an opinion piece warning markets not to bet on further yuan depreciation which suggests some unease within the authorities over currency trends. Treasuries secured further gains with the 10-year yield at fresh 4-month lows which sapped US currency support and the dollar dipped to 110.40 before stabilising around 110.60 while the Euro weakened to near 130.50 before recovering with underlying risk conditions remaining under close scrutiny.
The UK PMI construction index strengthened to 66.3 for June from 64.2 in May which was above consensus forecasts of 63.8 and the strongest reading for 24 years. There was further growth in new orders, but the main feature was further supply-side difficulties with delivery times lengthening by a record amount on the month. Employment increased at a strong rate for the month while prices paid increased at the fastest rate on record which reinforced underlying inflation concerns.
Sterling was unable to break above the 1.3900 level against the dollar following the UK data and there was a sharp reversal ahead of the New York open.
Sterling support was undermined by the weaker tone surrounding risk appetite, especially with UK equities moving lower during the day.
The UK government announced that there would be a further easing of restriction in August with attempts to boost employment levels by reducing the number of people needing to self-isolate. Markets were wary over the risk posed by a further increase in infection rates. Overall, Sterling retreated sharply to lows near 1.3775 against the dollar while the Euro found support below 0.8550. Sterling stabilised just above 1.3800 against the dollar on Wednesday with the Euro around 0.8565.
The Swiss currency was initially resilient on Tuesday and gradually gained ground as risk appetite deteriorated and equity markets came under some pressure. The decline in US and Euro-zone bond yields also provided net support for the franc while the yen maintained a firm tone.
The Euro retreated to near 1.0930 against the Swiss currency while the dollar posted net gains to near 0.9250. Risk conditions remained under scrutiny on Wednesday with the franc posting limited net gains and markets will be wary over the threat of potential franc sales by the National Bank.