EUR / USD
The March German trade surplus slumped to EUR3.2bn from a revised EUR11.1bn with a significant dip in exports and strong import growth given the surge in energy costs. The Euro-zone final PMI services-sector index for April was unchanged from the flash reading of 57.7 even Italian and Spanish readings beat expectations.
The EU announced another package of sanctions against Russia including a plan to phase out Russian oil imports within six months, although there may be exceptions for Slovakia and Hungary and there were still doubts over effective enforcement and whether there would be a substantial impact.
The Euro overall was able to make net gains into the Federal Reserve policy decision and traded just above 1.0550 against the dollar.
The Federal Reserve increased interest rates by 50 basis points to 1.00% which was in line with consensus forecasts and the vote was unanimous. According to the statement, household spending and investment remain strong despite a slight decline in economic activity for the first quarter while inflation remains elevated.
It added that further rate increases are expected, but also noted that the implications of the Ukraine war on the US economy are highly uncertain.
The Fed will start to shrink the balance sheet from the beginning of June with an initial cap at $47.5bn for the first three months which will then be increased to $95bn.
The central bank was optimistic that inflation would retreat to the 2% target with appropriate tightening and the dollar edged lower following the statement.
Comments from Fed Chair Powell were broadly hawkish on inflation with the need to tighten policy relatively quickly, especially as the labour market was very tight with strong upward pressure on wages. Nevertheless, he ruled out increasing interest rates by more than 50 basis points at any individual meeting.
Powell expressed hopes for a soft landing, but added that this would not be easy. The ruling out of rate hikes of more than 50 basis points provided decisive with 2-year yields declining 10 basis points. The dollar dipped with the Euro pushing above 1.0600 and it traded around 1.0610 on Thursday from 1.0640 highs.
US ADP data recorded a slowdown in private-sector payrolls of 247,000 for April compared with consensus forecasts of 395,000, although the March increase was revised up to 479,000. The ISM non-manufacturing index retreated to 57.1 for April from 58.3 previously and below market expectations of 58.5. Growth in new orders slowed and there was a net decline in employment, primarily due to supply-side difficulties. There were further notable inflation pressures with the prices index increasing at the fastest rate on record at 84.6 from 83.8 previously. Yields still moved higher, although the dollar was held close to 130.00.
US yields edged lower following the Fed policy statement and Powell’s comments with the dollar sliding to lows below 129.00 before a recovery.
Confidence in the Chinese outlook remained notably fragile with the Caixin services PMI index sliding to 36.2 from 42.0 previously which was below expectations and the second lowest reading since 2005. Japanese markets remained closed for a holiday with the dollar settling around 129.30 in early Europe on Thursday.
UK mortgage approvals declined slightly to 70,700 for April from a revised 71,000 the previous month and close to consensus forecasts. Overall mortgage lending, however, increased by more than expected while consumer borrowing was resilient with a monthly increase of £1.3bn for the month and overall net lending increased to £8.3bn from £6.3bn in March. Sterling was unable to gain any traction amid unease over the economic outlook and expectations that the Bank of England would decide on a dovish rate hike at Thursday’s policy meeting. There was a further dip below 1.2500 against the dollar, although with some buying support on dips.
After a brief dip to lows near 1.2450 against the dollar, there was a sharp dollar rebound to highs above the 1.2600 level with net Euro losses to near 0.8400.
Markets expect the Bank of England will sanction a further rate hike to 1.00% following Thursday’s policy decision, but also expect a dovish rate hike.
Sterling lost ground on Thursday with Brexit and political tensions also undermining confidence. Sterling dipped to around 1.2550 with the Euro advancing to 0.8460.
Swiss National Bank member Maechler stated that a strong franc helps guard against inflation and although there were expectations that inflation would come back down again, the central bank needed to be vigilant. The rhetoric maintained speculation that the central bank would tolerate medium-term franc gains.
There were, however, still notable franc losses during the day with Euro gains to 1.0370. The franc recovered ground following the Fed statement with the dollar sliding from 26-month highs at 0.9850 to around 0.9730. The Euro also dipped to around 1.0320 with little net change on Thursday.