EUR / USD
The Euro was unable to make any headway ahead of Thursday’s market open with important underlying concerns surrounding the Ukraine conflict. There was also net Euro selling against the dollar after Sterling came under heavy selling pressure following the Bank of England policy meeting.
ECB council member Rehn stated that it would be reasonable to hike interest rates 25 basis points in July which provided only slight Euro protection. There were further concerns over the Ukraine situation, especially with concerns that Russia would escalate attacks ahead of the May 9th Victory Day parade.
US initial jobless claims increased to 200,000 in the latest week from a revised 181,000 previously and above consensus forecasts of 182,000 while continuing clams declined to 1.38mn from 1.40mn and the overall evidence indicated that the labour market remained tight.
Yield spreads and renewed dollar support boosted the US currency in New York and there was heavy selling pressure on commodity currencies which also boosted the US dollar. In this environment, the Euro declined sharply to lows near 1.0500 at the European close while the dollar index posted a fresh 20-year high.
The latest US employment report will be released on Friday with expectations of an increase in non-farm payrolls of close to 400,000 for April and a further tick lower in unemployment to 3.5%. The wages data will an important element, especially given the Fed focus on a tight labour market and upward pressure on wages.
Comments from Fed speakers will also be monitored closely during the day. The Euro was able to find slight relief on Friday and traded around 1.0525 against the dollar, although the US currency overall registered only a marginal decline with a reluctance to sell the currency ahead of the weekend.
After limited gains following Wednesday’s Federal Reserve policy meeting, US Treasuries were subjected to sustained selling on Thursday. The 10-year yield moved back to the 3.00% level and a break above this level helped trigger a surge to highs around 3.10% and the highest level since early December 2018.
The surge in yields underpinned the dollar, although the yen did gain an element of protection from a slide on Wall Street and the dollar advanced to post net gains to around 130.40. The dollar was broadly resilient despite a further slide in US equities amid an element of defensive support.
Risk sentiment inevitably remained fragile in Asia on Friday, especially with further concerns over the Chinese outlook as the coronavirus restrictions continued to sap domestic activity. Expectations of a further increase in US short-term rates continued to provide underlying dollar support and it traded just above 130.50.
The UK services PMI index was revised to a final 58.9 from the flash reading of 58.3, but had no impact and Sterling held steady into the Bank of England decision.
The central bank increased interest rates by a further 25 basis points to 1.00% which was in line with consensus forecasts. There was, however, a 6-3 split for the decision with Haskel, Saunders and Mann voting for a larger 50 basis-point increase and the decision was slightly more hawkish than expected.
The monetary policy report stated that inflation was expected to peak just above 10% late this year. The revised growth forecasts were a key element with a notably bleak set of results. The bank forecasted that GDP would dip in the fourth quarter of this year and contract slightly in 2023 with only marginal growth in 2024.
The consensus was that further rate increases would be needed, but some members disagreed with this analysis and suggested that rates should not increase further. The very downbeat stance on the economy triggered a downward revision to interest rate expectations and Sterling came under heavy pressure.
There were initial losses to below 1.2400 against the dollar while the Euro posted a strong advance to 2022 highs near 0.8550.
The slide in risk appetite also undermined support for the UK currency after the Wall Street open with 22-month lows below 1.2350. Sterling secured a limited net recovery to just above 1.2350 against the dollar on Friday with the Euro around 0.8515. Markets will monitor comments from Bank of England officials during the day.
Swiss consumer prices increased 0.4% for April, slightly above consensus forecasts of 0.3% while the year-on-year rate was in line with expectations of 2.5% from 2.4% previously. The higher inflation rate will maintain expectations that the National Bank will tolerate franc appreciation over time.
The Swiss franc failed to gain support from the slide in risk appetite with markets tending to focus on yields. The Euro secured a net advance to 1.0380 while the dollar surged to fresh 26-month highs near 0.9880. The franc was little changed on Friday with a slight net retracement against the dollar.