EUR / USD
The Euro was unable to make headway ahead of Wednesday’s New York open with further unease over the Euro-zone outlook. The IFO raised its estimates of German inflation to 5.1-6.1% for 2022 from the 3.3% forecast in December, emphasising the difficulties for the ECB in setting policy.
The Euro was also undermined by a fresh increase in energy prices during the day with Brent crude advancing to 2-week highs near $115 p/b. There was no evidence that peace talks between Russia and Ukraine were making any headway which maintained unease over euro-zone economic trends.
The Euro dipped back below the 1.1000 level ahead of the New York open amid expectations that underlying yield spreads would hurt the single currency.
Euro-zone consumer confidence dipped sharply to -18.7 for March from -8.8 previously which was below expectations of -13.0 and the weakest reading since May 2020.
The Euro did, however, find support just above Monday lows at 1.10960 and edged back to the 1.1000 level at the European close.
The dollar secured net gains on Thursday amid underlying yield spreads with the Euro around 1.0980 ahead of the Euro-zone PMI business confidence data for March. Markets will also monitor energy prices very closely following President Putin’s demand that gas supplies are paid for in roubles.
US new home sales declined to an annual rate of 772,000 for February from 788,000 previously and below consensus forecasts of 810,000 with concerns that higher mortgage rates would sap demand. US equity futures lost ground ahead of the New York open and Treasuries posted net gains with the 10-year yield retreating to near 2.35%. As yields declined there was also a significant dollar correction with a dip back below the 121.00 level against the yen.
Following the Finance Ministry’s comments on Tuesday, markets remained wary over the potential for verbal intervention from the Bank of Japan which tended to curb further yen selling, but there was still interest in funding carry trades through the Japanese currency.
Cleveland Fed President Mester stated reiterated that frontloading interest rate hikes would better position policy going forward and that the Fed needed to make aggressive rate hikes earlier than later while she thought it would be necessary to do some 50 basis-point moves this year.
San Francisco head Daly also commented that the central bank is prepared to do whatever it takes to get price stability. She considers a neutral rate is around 2.5% and rates may need to go slightly above this level. St Louis Fed President Bullard stated that the central bank can run down the balance sheet faster than last time.
Japan’s PMI manufacturing index edged higher to 53.2 for March from 52.7 while the services index recovered to 48.7 from 44.2, but still in contraction territory while Bank of Japan member Kataoka stated that economic risks are skewed to the downside. The dollar strengthened to fresh 6-year highs at 121.70 on Thursday.
Sterling was unable to gain support from the higher than expected UK inflation data, especially as markets have already priced in a more substantial tightening of monetary policy by the Bank of England. In his fiscal statement, Chancellor Sunak announced a 5p per litre reduction in fuel duty and also announced a substantial increase in the National Insurance threshold of £3,000, but there were no other major measures to alleviate the immediate stresses on disposable income.
The OBR downgraded the 2022 outlook substantially with GDP seen increasing 3.8% compared with 6.0% previously. For the following two years, forecasts are now 1.8% and 2.1% respectively. Given high inflation, the OBR also stated that real living standards are set to decline 2.3% for 2022/23, the sharpest decline on record.
Markets had been expecting more substantial near-term relief measures which caused some further unease over the near-term outlook. Sterling did resist further losses and stabilised around 1.3200 against the dollar as US yields declined while the Euro advanced to 0.8330.
Sterling settled just below 1.3200 on Thursday with the Euro little changed as markets mulled the underlying UK and global economic outlook.
The Swiss franc resisted any selling pressure on Wednesday with the Euro retreating to around 1.0250 while the dollar also posted a net loss to 0.9315. There were further concerns over the Ukraine situation and equities edged lower which helped underpin the Swiss currency.
There are strong expectations that the National Bank will leave interest rates at -0.75% at the latest meeting, but there is also speculation that the central bank rhetoric will be less dovish, especially as Swiss inflation has increased. There is scope for choppy trading following the meeting with the dollar around 0.9325 in early Europe.