EUR / USD
The headline Euro-zone CPI inflation rate increased to a record high of 7.5% for April from 7.4% previously and in line with consensus forecasts, while the underlying rate increased more than expected to a series-high of 3.5% from 2.9% in March.
The Euro-zone PMI services-sector index was revised to a final 55.5 from the flash reading of 55.3. Euro-zone industrial sentiment retreated to 7.9 for April from 9.0 previously while the services-sector sentiment edged lower to 13.5 from 13.6 with both readings below consensus forecasts, although there was a net gain for the business climate index. Underlying confidence in the Euro-zone outlook remained fragile, especially with fears over an escalation in the Ukraine conflict. EU officials also continued to discuss energy policy with further pressure for an outright ban on Russian crude imports, but failed to reach a consensus.
The Euro was unable to hold initial gains on Monday and gradually drifted lower with strong pressure from overall yield spreads.
The US ISM manufacturing index retreated to 55.4 for April from 57.1 in March which was significantly below consensus forecasts of 57.6 and the lowest reading since October 2020. There was a small net slowdown in the rate of growth in orders and production while employment growth slowed sharply. Order backlogs increased at a slower rate on the month and there was a slight easing in cost pressures with the prices index edging lower to 84.6 from 87.1 in March.
Reaction to the data was relatively muted with the dollar overall continuing to gain support on yield spreads and it dipped back below the 1.0500 level against the dollar.
The Euro did manage to regain this level on Tuesday, but remained firmly on the defensive as yield spreads underpinned the US currency.
Comments from ECB President Lagarde will be watched closely on Tuesday with position adjustment ahead of Wednesday’s Fed policy statement also significant.
The latest CFTC data recorded a decline in short yen positions to 95,000 contracts in the latest week from over 107,000 previously, but there is still substantial scope for position adjustment if there is a sustained shift in market sentiment.
China’s manufacturing PMI index dipped to 47.4 for April from 49.5 previously and slightly below forecasts while there was a much steeper retreat in the non-manufacturing index to 41.9 from 48.4 and compared with market expectations of 46.0. Overall confidence in the Chinese outlook remained weak after the data.
Although equities had retreated sharply on Friday, US Treasuries lost ground on Monday with the 10-year yield pushing to near 3.0% and the highest level since December 2018. The dollar gained limited support from higher yields, but was hampered by a fresh reversal in equities and dipped to test support below 130.0 against the yen before edging back above this level as Wall Street indices recovered. Trading conditions were subdued in Asia with Japanese and Chinese markets closed for holidays. US equity future recovered slightly and the dollar traded just above the 130.00 level with the Euro around 136.70.
The latest COT data released by the CFTC recorded a further increase in non-commercial short Sterling positions to near 70,000 contracts from below 59,000 previously and the largest short position since October 2019. UK markets were closed on Monday, but underlying Sterling sentiment remained notably fragile, especially given the slide on Wall Street seen on Friday and wider vulnerability surrounding risk appetite. The UK currency remains very sensitive to overall risk conditions.
Sterling initially corrected to highs near 1.2600 on Monday, but gradually lost ground amid the wider lack of fundamental support and a renewed slide in US equity markets. In this environment, it dipped back below the 1.2500 level against the dollar at the European close while the Euro secured a net recovery to just above 0.8400 after sharp losses on Friday. A steadier tone surrounding risk helped limit further Sterling selling as it traded just above 1.2500 against the dollar on Tuesday.
The Swiss PMI index declined to 62.5 for April from 64.0 previously, although this was above consensus forecasts and suggested economic resilience, although global developments tended to dominate. Swiss sight deposits increased to CHF744.4bn in the latest week from CHF742.6bn the previous week which suggested modest intervention by the National Bank to curb upward pressure on the Swiss currency.
Weaker risk appetite vied with higher global bond yields for dominance with yields winning out to a limited extent. The Euro posted net gains to 1.0280 with the dollar strengthening to 0.9775 at the European close. Higher global yields limited franc support on Tuesday with the dollar around 0.9780 against the franc.