EUR / USD
The latest German labour-market data recorded an unemployment decline of 13,000 which was close to expectations and followed an 18,000 decline the previous month. The Euro was able to find support just below the 1.0500 level against the dollar and was able to consolidate above this level ahead of the New York open.
There were still important concerns surrounding the Ukraine situation, especially with fears over an escalation in fighting ahead of the May 9th victory day in Russia given that there will be strong pressure to show results. Latest rhetoric from President Putin provided marginal relief with comments that he was still open for talks with Kyiv.
ECB council member Schnabel stated that the central bank may need to raise interest rates in July to combat extreme inflation and that it was time to act.
The Euro advanced to highs around 1.0575 after the New York open, but failed to hold the gains and retreated to around 1.0515 as underlying Euro sentiment remained negative and the dollar also recovered ground in global markets.
The Federal Reserve will announce its interest rate decision on Wednesday with strong expectations that the central bank will announce an interest rate of 50 basis points to 1.00%. Futures markets indicate there’s a small possibility of a larger 75 basis points increase. The rhetoric on inflation will be important with forward guidance from Chair Powell also a key element for asset classes. Markets will also be expecting a decision to start shrinking the balance sheet.
A very hawkish stance would underpin the dollar while a more balanced assessment and reference to growth risks would increase the potential for a dollar correction.
Consolidation dominated in early Europe on Wednesday with the Euro little changed around 1.0515 and a tough stance has been priced in for the US currency.
JPY
US Treasuries were able to secure support ahead after Wednesday’s New York open with the 10-year yield retreating from the 3.00% level. Equities overall were little changed on the day and lower yields were significant in pushing the dollar slightly lower with a retreat back below the 130.00 level.
US factory orders increased 2.2% for March after a revised 0.1% increase the previous month. According to JOLTS data, the number of job openings increased to 11.55mn for March from 11.34mn previously which was above expectations and continued to signal a tight labour market.
US yields edged higher again into the European close with the dollar back above the 130.00 level.
Chinese markets remained closed for holidays, but there was further unease over coronavirus developments with Beijing schools closed for a further week.
The dollar consolidated above the 130.o0 level on Wednesday as caution prevailed ahead of the Fed policy decision with little change in equities and higher yields.
GBP
The UK PMI manufacturing index was revised to a final reading of 55.8 from the flash reading of 55.3. Growth in new orders growth and there was significant weakness in export orders amid weak demand from the Euro area which was related in part to underlying Brexit issues. There was further strong upward pressure in costs with no companies reporting a decline in prices paid for the first time in the survey’s history while output charges increased at the fastest rate on record. Overall business confidence dipped to a 16-month low which reinforced unease over developments.
Sterling was able to make headway ahead of the New York open with a peak around 1.2565 against the dollar. Underlying confidence remained fragile and Sterling was unable to sustain the gains with a retreat to re-test support below 1.2500 into the European close.
The Euro was able to secure a slight net advance to 0.8415 despite solid risk conditions. BRC data recorded an increase in shop prices of 2.7% in the year to April, the highest rate since 2011. Consensus forecasts are that that the Bank of England will raise interest rates by a further 0.25% on Thursday, but markets expect a dovish hike which will fail to support Sterling. The UK currency was held below 1.2500 on Wednesday with lows around 1.2470 and the Euro just above 0.8420.
CHF
The Swiss franc was resilient in early Europe on Tuesday, but gradually lost ground during the day as expectations of higher global yields sapped support.
The Euro edged above the 1.0300 level before settling close to this level while the dollar recovered from lows around 0.9720 to post a 24-month high close to the 0.9800 level. The Federal Reserve tone will be important for the franc on Wednesday with the franc vulnerable if there is a hawkish tone. A more measured tone would limit pressure on the franc and it traded just below 0.9800 in early Europe.
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