EUR / USD
The Euro continued to gain an element of support in early Europe on Monday with some relief and short covering following the first round of the French presidential election, although markets were still wary over the risk that National Front le Pen could secure an upset victory in the second round.
Higher German bond yields were a factor providing Euro support with the 10-year yield increasing to above 0.80% and the highest level for over seven years.
There was also a further limited shift in ECB rate expectations with markets pricing in 70 basis points of rate hikes by December compared with 65 basis points on Friday. Overall confidence in the Euro-zone outlook remained weak and the Euro was unable to sustain the move with a peak around 1.0935 before a retreat back below 1.0900 after the New York open. The dollar maintained a firm tone and the Euro retreated to 1.0880 at the European close.
Chicago Fed President Evans stated that a 50 basis-point rate hike is worthy of considerations and perhaps highly likely. He did, however, add that the Fed needs to allow itself some time to get to neutral rates. Money markets have priced in over a 90% chance of a 50-basis-point hike at the May meeting.
The latest US inflation data will be released on Tuesday with consensus forecasts that the headline rate will increase to a fresh 40-year high of 8.4% from 7.9% previously while the core rate is expected to increase to 6.6% from 6.4% and also the highest reading since 1982.
Stronger than expected data would reinforce pressure for a much more aggressive Fed tightening and potentially support the dollar while lower figures would provide an element of relief. Narrow ranges prevailed on Tuesday with the Euro settling around 1.0880 as markets also continued to monitor Ukraine developments.
The yen had been firmly on the defensive in Asian trading on Monday and selling intensified during the European session as US Treasuries continued to lose ground. The decisive dollar break above the 125.0 level was important in triggering stop-loss yen selling and the US currency surged to fresh 6-year highs around 125.75 ahead of the New York open. There was a cautious tone surrounding equity markets, especially with further concerns that China was losing control of the coronavirus outbreak, but the yen was unable to secure any defensive support as yield trends dominated.
US Treasuries were able to stabilise after the New York open which limited the scope for further yen selling and the dollar settled around 125.50 at the European close..
Japanese Finance Minister Suzuki stated that excess FX volatility and disorderly FX movements could have adverse effects on the economy and financial stability. There were reservations over selling the yen after the comments, but underlying yen sentiment remained negative amid widening yield spreads.
There were slightly more encouraging developments surrounding the Shanghai lockdown on Tuesday, but Chinese Premier Li issued another warning over the economic outlook. Overall, the dollar found support above 125.0 and rallied again to above 125.50 in early Europe as yen sentiment remained negative.
Sterling edged lower in early Europe on Monday with the latest batch of UK data releases causing further concern over the outlook. There were important concerns that the official level of GDP would be undermined by a dip in healthcare spending as coronavirus testing was scaled back sharply.
Although UK yields moved sharply higher on the day, overall yield spreads still moved against the UK currency given the surge in US yields.
Sterling did again find support below 1.3000 against the dollar which encouraged a limited round of short covering, but sentiment remained weak.
BRC data recorded a 0.4% decline in like-for-like retail sales for March from 2.7% previously while inflation pressures increased to an 11-year high.
UK labour-market data recorded a slight decline in unemployment to 3.85 from 3.9% while core average earnings increased 4.0% over the year from 3.8% with both figures in line with expectations. The data failed to underpin Sterling, although it was able to hold just above 1.3000 against the dollar with the Euro around 0.8350.
Swiss sight deposits increased to CHF739.4bn in the latest week from CHF737.2bn the previous week. The increase continued to suggest that the National Bank had been intervening to curb potential franc gains, although the intervention amounts were relatively modest and failed to jolt market sentiment.
Inflation differentials underpinned the franc amid expectations that the central bank would tolerate medium-term currency gains. The Euro retreated to near 1.1020 while the dollar was unable to make any headway and dipped to test the 0.9300 level. There was little change on Tuesday with the dollar held just above the 0.9300 level.