EUR / USD
On Wednesday, ECB President Lagarde stated that asset purchases should be completed early in the third quarter and that the first rate hike would take place sometime afterwards and this could be a period of weeks. She added that it looks increasingly unlikely that the disinflationary dynamics of the past decade will return.
Council member Schnabel stated that risks are growing that current high inflation is becoming entrenched in expectations and inflation could stay at painfully high levels for a considerable period of time. In this context, she added that the urgency for monetary policy to take action to protect price stability had increased in recent weeks.
The rhetoric overall suggested that the ECB was signalling more strongly that rates would be increased in July and also that the longer-term path of interest rates should be revised higher. There were also source reports that the deposit rate would be moved back above zero this year with some Euro protection.
US consumer prices increased 0.3% for April compared with expectations of a 0.2% increase with the decline in the year-on-year rate limited to 8.3% from 8.5% and above expectations of 8.1%. Food prices increased 0.9% on the month with an 8.3% annual increase while energy prices increased 30.3% over the year despite a 2.7% monthly retreat. The underlying rate declined to 6.2% from 6.5%, but this was also slightly above market expectations of 6.0%. Used car and apparel prices declined on the month, but there was a strong increase in the cost of transport services on the month.
The dollar posted immediate gains after the inflation data, but the Euro found support just above 1.0500 and recovered ground as the dollar lost ground.
There were further uncertainties over European gas supplies and the drifted back towards 1.0500 without breaking lower. There was little net change on Thursday with the Euro around 1.0520, although the dollar overall remained strong as commodity currencies came under renewed pressure.
JPY
Treasuries dipped sharply after the US inflation data with the 10-year yield spiking to highs near 3.04% from 2.95%. There was, however, buying on dips and the yield dipped back below the 3.00%.The dollar jumped to highs around 130.80 before fading later in the session. As Wall Street equites came under pressure, there were further losses back below the 130.0 level, especially with a fresh slide in the Nasdaq index. Atlanta Fed President Bostic stated that he would support moving rates more if inflation persists while St Louis head Bullard stated that he was comfortable with 50 basis-point increases at the next two meetings.
The Bank of Japan summary of opinions from April’s policy meeting stated that a weak yen works positively when trend inflation is very low and there is a substantial output gap which limited yen support. Risk appetite remained fragile in Asia on Thursday with Chinese property developer Sunac defaulting on a dollar bond payment while there were renewed concerns over coronavirus trends in Shanghai. The dollar dipped to lows at 129.50 before a slight recovery to 129.65 in early Europe.
GBP
Overall Sterling confidence remained very fragile during Wednesday with further concerns over the economic outlook and persistent speculation that the Bank of England would be unable to sanction aggressive rate hikes. With a series of aggressive rate hikes from the Federal Reserve and more hawkish rhetoric from the ECB, there were expectations that relative yields would move against the UK currency.
The renewed increase in Brexit tensions was also a negative Sterling factor with further UK threats to suspend the Northern Ireland protocol
There was a slide below 1.2300 against the dollar after the stronger than expected US inflation data, but with a quick move back above this level. There was renewed UK selling later in the day with a fresh dip in risk appetite undermining support and a slide below 1.2250 against the dollar. RICS housing data remained strong with the index at 80% for May from 74% previously. UK GDP, however, declined 0.1% for March with first-quarter growth held at 0.8% and below forecasts of 1.0%. Industrial output and trade data were also worse than expected. Sterling dipped to 2-year lows just below 1.2200 against the dollar with the Euro at 7-month highs around 0.8615.
CHF
The Swiss franc regained ground on Wednesday despite the hawkish ECB rhetoric. The Euro retreated to near 1.0450 after failing to mount another challenge on 1.0500 while the dollar dipped to lows around 0.9870 before a recovery.
There was some speculation that the Swiss National Bank would look to adopt a more hawkish stance over the medium term. Correlations with risk conditions remained limited with the franc edging lower on Thursday and the dollar moved back above the 0.9950 level.
Technical Levels
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