EUR / USD
The dollar edged higher ahead of Tuesday’s market open with the Euro drifting lower amid caution and position adjustment ahead of the latest US inflation data.
The US NFIB small business optimism index strengthened to 102.5 from 99.6 previously with further upward pressure on costs.
US consumer prices increased 0.9% for June after a 0.6% increase the previous month and well above consensus forecasts of 0.5%. The year-on-year rate increased to 5.4% from 5.0% and above market expectations of 5.4%. This was the highest headline annual rate since September 2008.
Underlying prices jumped 0.9% on the month after a 0.7% increase previously and well above forecasts of 0.4%. The annual rate increased to 4.5% from 3.8% and the highest rate since October 1991. There was a further surge in the price of used cars for the month with a 45% annual increase while overall energy prices increased 1.5% over the year with a 24.5% annual increase. There was also further upward pressure on rents and the data triggered further debate over the inflation outlook.
Following the data, there was a further retreat in Fed Funds rate futures with the market close to fully pricing in an increase in interest rates by the end of 2022 with expectations that tapering plans would be brought forward which underpinned the US currency.
The dollar posted sharp gains in an initial reaction to the data with the Euro dipping below the 1.1800 level. The US currency partially retraced as yields edged lower, but there was renewed dollar buying later in the session as the Euro retreated again to lows near 1.1780 with the dollar testing 3-month highs. Fed Chair Powell’s testimony will be watched very closely on Wednesday for further evidence on Fed thinking. The dollar maintained a firm tone with the Euro close to 3-month lows near 1.1780.
St Louis Fed President Bullard stated that the time is right to pull back on stimulus measures with the economy in a good position to start tapering of bond purchases, especially with some concerns that the central bank is feeding a housing bubble.
US Treasuries moved lower in an immediate reaction to the US CPI data, but the overall reaction was muted and yields quickly moved back to little changed. Equity futures were also broadly resilient despite limited net losses and initial dollar gains were held to just above 110.50.
San Francisco Fed President Daly stated that it was time to talk about tapering which fuelled further expectations of a shift in the internal Fed debate.
After paring gains, there was renewed dollar support after the European close with long-dated Treasuries declining sharply after a weak 30-year auction. US yields moved significantly higher with the 10-year yield above 1.40% and the dollar moved to near 110.60 against the yen.
Japan’s monthly Tankan index recorded a 30-month high in the manufacturing sector, but there was deterioration within the services sector as coronavirus concerns persisted. The dollar was unable to hold the gains on Wednesday and drifted to around 110.50 as US yields edged lower with the Euro holding above 130.0.
Sterling was unable to gain further traction in early Europe on Tuesday with a cautious tone following the Bank of England financial stability report as the bank warned that risks to the economy remain and some asset prices were elevated. Governor Bailey also warned that there was sensitivity to higher borrowing rates in weaker parts of the economy. Overall risk appetite held broadly steady which helped limited selling pressure on the UK currency.
There were also still reservations over developments surrounding the Delta variant which could trigger a policy U-turn over the next few weeks.
Sterling dipped to near 1.3800 against the dollar after the US inflation data and remained on the defensive later in the session, but the Euro retreated to around 0.8525.
The headline UK inflation rate increased to 2.5% for June from 2.1% and above consensus forecasts of 2.2% with the core rate increasing to 2.3% from 2.0%. Sterling gained amid expectations of a more hawkish Bank of England tone with a move to 1.3835 against the dollar and the Euro retreated to 3-month lows around 0.8520.
Swiss National Bank Chair Jordan stated that domestic inflation expectations remain well anchored and that the bank will continue to use unconventional measures including currency-market intervention where necessary. There was little impact with the currency holding firm in global markets.
The higher than expected US inflation data triggered demand for the franc given its long-term defensive qualities. The Euro retreated to near 1.0820 against the franc while the dollar was unable to break above the 0.9200 level and the Swiss currency held firm on Wednesday with the dollar held around 0.9180.