EUR / USD
The Euro was unable to make any headway ahead of the New York open on Thursday with selling on approach to 1.1850 against the dollar.
The US Philly Fed manufacturing index weakened to 21.9 for July from 30.7 previously and below consensus forecasts of 28.1. There was also a slowdown in the rate growth in production and new orders. There was further strong growth in employment, but there was slight moderation in the rate of price increases from 42-year highs previously. Companies remained optimistic over the outlook and there were expectations that supply-side issues would ease over the second half of the year.
The New York Fed manufacturing index strengthened sharply to 43.0 from 17.4 in June and substantially above market expectations on the month. There was also a strong increase in new orders and production rates on the month. There was a slight easing of upward pressure on delivery times while price indicators were mixed.
Initial jobless claims declined to a 16-month low of 360,000 in the latest week from 386,000 previously and below consensus forecasts while continuing claims declined to 3.24mn from 3.37mn the previous week which maintained underlying confidence in the jobs market.
The dollar gradually gained traction during the New York session with the Euro retreating to lows at the 1.1800 level as commodity currencies moved lower.
Risk conditions attempted to stabilise on Friday and the Euro held just above 1.1800, although the dollar overall held firm with solid underlying demand.
US Treasuries edged higher ahead of the New York open with bond yields edging lower with the 10-year yield below 1.35% while equity futures moved lower. US industrial production increased 0.4% for June after a revised 0.7% increase the previous month and slightly below market expectations.
The dollar found support near 109.75 and regained ground as yields moved higher, but struggled to break back above the 110.00 level.
St Louis Fed President Bullard continued to push for a tapering of bond purchases while Chicago President Evans maintained a more cautious stance with expectations of the first-rate hike in 2024, although it would not take much to move this to 2023. Fed Chair Powell emphasised the unprecedented nature of the current spike in inflation and that the Fed will continue to monitor developments closely. Treasury Secretary Yellen stated that there will be several more months of rapid inflation ahead.
The yen gained support on the crosses with the dollar trapped just below 110.00 and the Euro retreating to below 130.0.
The Bank of Japan made no policy changes at the latest meeting with the 10-year yield target held at 0.0%. The bank downgraded GDP forecasts slightly for this fiscal year. The overall reaction was muted with the dollar trading just below 110.00 in early Europe while the Euro was held below 130.0.
Sterling initially secured gains following the UK jobs data with optimism over labour-market trends, although there was a quick reversal with losses after equity markets opened. Markets were uneasy over the further sharp increase in coronavirus cases and risk of disruption to economic activity.
Bank of England monetary policy committee member Saunders expressed increased concerns over the inflation outlook with a risk that there would be a rate of 3.5-4.0% late in the year. He also warned over the risk that not all inflation pressures would be transitory. In this context, he noted that the conditions for being able to tighten monetary policy had been met and he added that it could be appropriate to remove some of the policy accommodation relatively quickly with an ending of bond purchases. He did not make a specific forecast but suggested that he would back a cut in bond purchases at the August policy meeting.
Sterling moved sharply higher following Saunders’ comments with a push to near 1.3900 against the dollar with the Euro also weakening sharply to around 0.8510.
Sterling was unable to hold the gains and gradually moved lower in US trading with a weaker tone in risk appetite contributing to the loss of support. Overall, there was a retreat to near 1.3800 against the dollar and the Euro rallied to 0.8550. Sterling attempted to recover some ground on Friday, but underlying caution prevailed.
The Swiss franc initially lost some ground on Thursday with expectations that the National Bank was looking to curb upward pressure on the Swiss currency.
The Euro rallied to the 1.0850 area despite a mixed tone elsewhere while the dollar secured a net advance to around 0.9190.
Markets will continue to monitor global inflation developments closely in the short term. The franc resisted further selling on Friday with the Euro trading below the 1.0850 level and dollar around 0.9180 as yield spreads limited potential selling. Long-term global inflation concerns continued to provide underlying franc support.