EUR / USD
Relatively narrow ranges prevailed ahead of Wednesday’s New York open as markets continued to evaluate global trends in economic outlook and monetary policies.
Underlying Euro-zone sentiment remained weak, especially with important reservations over the situation in Ukraine. There was, however, some reluctance to sell the Euro ahead of Thursday’s ECB policy meeting as position adjustment gathered pace.
US producer prices increased 1.4% for March, above consensus forecasts of a 1.0% increase, with the year-on-year rate at 11.2% from 10.3% the previous month. Underlying prices increased 1.0% for the month with the annual rate at 9.2% from 8.7% in February. The data maintained underlying concerns surrounding inflation pressures at the wholesale level, increasing the risk that pressures will feed through into consumer prices.
The dollar secured a limited gain after the data, but the Euro found support just above early March lows and there was an element of short covering after the Wall Street open. The dollar also faded from highs with a limited correction despite hawkish Fed rhetoric and the Euro strengthened to near 1.0900.
There will be important hawkish voices within the ECB governing council which will make it difficult for President Lagarde to avoid a more hawkish statement. The bank, however, will still want to maintain as much flexibility as possible. The dollar remained slightly lower on Thursday with the Euro edging above the 1.0900 level ahead of the ECB policy meeting. There will inevitably be choppy trading later in the day following comments from bank President Lagarde.
US Treasuries edged higher ahead of the New York open and rallies further after the US data despite the higher than expected producer prices reading. The 10-year yield dipped below the 2.70% level which limited dollar support and it retreated back below 126.0 against the yen.
Wider dollar losses continued to sap overall support with a retreat to below 125.50 at the European close.
There were no comments on monetary policy from Fed officials before the European close, but later in the day Fed Governor Waller stated that this is a good time to do aggressive actions as the economy can handle it. He added that he wants to get above a neutral rate by the latter half of the year and could support three 50 basis-point rate hikes by July. The dollar struggled to gain further support from hawkish Fed rhetoric as longer-term yields retreated.
A survey from Japan indicated that 75% of companies are concerned that yen weakness is bad for business and bank of Japan deputy Governor Wakatabe stated that forex stability was desirable, but finance minister Suzuki stated that the country has not emerged from deflation.
Risk appetite held firm in Asia with strong speculation that the Chinese central bank would cut interest rates this weekend. The dollar was able to hold above 125.0 against the yen and settled around 125.35 in early Europe with the Euro around 136.70.
Sterling was unable to gain significant support following the higher than expected UK inflation data. There were doubts whether the Bank of England would be able tighten monetary policy aggressively given the threat to the UK economy and real interest rates will remain very negative. The global monetary policy tightening was also a key element limiting potential Sterling support. The currency did, however, gain support from the market failure to hold below the 1.30 level against the dollar and a break back above this level triggered significant short covering. A weaker dollar continued to underpin Sterling and there was a net gain to 1.3100 at the European close.
RICS data recorded a small decline in the housing index to 74% from 78% previously as market supply started to recover.
There will also be an element of position adjustment ahead of the Easter holidays in the UK which could lead to a further covering of short Sterling positions
Sterling maintained a firmer tone on Thursday with net gains to 1.3135 against the weaker dollar while the Euro tested the important 0.8300 level.
The Swiss franc weakened slightly on Wednesday as global central bank tightening limited potential support for the Swiss currency. The Euro edged higher amid pressure for a more hawkish ECB policy stance. The franc still gained underlying support from expectations that inflation differentials would allow medium-term gains for the Swiss currency. The Euro secured a more decisive gain to 1.0150 at the European close with the dollar held around 0.9330.
The Euro strengthened further to 1.0180 on Thursday with markets waiting for the ECB policy statement with little change for the dollar.