EUR / USD
ECB council member Makhlouf stated that the era of negative rates is reaching a conclusion. He added that the current level of inflation is concerning and it was realistic to expect rates will be in positive territory by early next year. The Euro was unable to derive support from the broadly hawkish comments from ECB officials. There was fresh unease over developments in the energy sector with Ukraine stating that it will not re-open the suspended gas transit route from Russia until Kyiv gains full control over the transit system. The Euro dipped back below the 1.0500 level and the inability to regain this level quickly triggered a wave of selling with a rapid slide.
US producer prices increased 0.5% for April, in line with consensus forecasts, while the year-on-year rate declined slightly to 11.0% from 11.5% and slightly above market expectations. Core prices increased 0.4% on the month with the year-on-year increase at 8.8% from 9.6% previously and marginally below expectations of 8.9%.
Initial jobless claims increased slightly to 203,000 from a revised 202,000 and above forecasts of 195,000 while continuing claims declined to 1.34mn from 1.39mn.
Risk conditions remained a key element during the day with the dollar continuing to gain defensive support while the Euro remained under pressure. The dollar posted a fresh 20-year high while the Euro slumped to a fresh 5-year low below 1.0400 and close to 19-year lows. The Euro secured a marginal recovery to around 1.0400 on Friday with risk trends and position adjustment likely to dominate during the day amid choppy overall market conditions.
There further reservations surrounding Chinese coronavirus developments with Beijing conducting another round of mass testing. Overall risk appetite remained vulnerable in early New York with renewed losses in equities undermining confidence. Treasuries secured further gains with the 10-year yield sliding to lows near 2.80%. In this environment, there was further defensive yen support with the dollar sliding rapidly to lows near 127.50 before a recovery back above 128.00.
San Francisco Fed President Daly stated that she would like to see a further tightening of financial conditions and added that there was no need to change course from 50 basis-point rate increases at the next two meetings. Fed Chair Powell was confirmed by the Senate for a second term and reiterated that he was firmly committed to bringing inflation back under control. He also added that it was still appropriate at this stage to increase rates by 50 basis-points at the next two meetings, although the central bank will be adaptive. He did warn over the risk of a hard landing for the economy, especially with factors outside the Fed’s control.
Bank of Japan Governor Kuroda warned against excessive yen volatility, but also stated that it was appropriate to maintain dovish forward guidance on interest rates.
Equity markets recovered ground on Friday and the dollar strengthened to highs around 129.35 before retreating to around 128.70.
Sterling continued to lose ground in early Europe on Thursday with markets unimpressed by the latest round of data. The GDP release intensified concerns over the outlook and risk of recession with the possibility that the UK economy will contract for several quarters as the increase in energy prices bites.
In comments on Thursday, Bank of England Deputy Governor Ramsden stated that the bank had not gone far enough yet in terms of tightening monetary policy. He also considered that there are upside inflation risks over the medium term with stronger than expected pressures from rising wages. He did, however, consider that the rate hikes seen already were having an impact. The hawkish rhetoric had only limited impact with markets focusing on risk conditions.
There were further concerns over Brexit developments with EU Commission Vice President Sefcovic stating that the EU is united in not re-negotiating the Northern Ireland Protocol. He also accused the UK of not meeting the EU halfway. Political rhetoric will be watched closely in the short term.
Sterling dipped to 2-year lows around 1.2160 against the dollar before finding an element of support while the Euro retreated sharply to near 0.8500. A recovery in equities provided an element of relief on Friday with Sterling trading just above the 1.2200 level against the dollar with little net change for the Euro.
There was a mixed Swiss franc performance on Thursday as overall volatility increased sharply in global currency markets. The franc overall was hampered by adverse yield spreads even though there was a retreat in longer-term US yields. The Euro dipped sharply to lows near 1.0365 before a tentative recovery while the dollar hit parity for the first time since December 2019 and pushed to 3-year highs near 1.0050. A tentative recovery in risk appetite limited franc support on Friday and the dollar traded above the parity level. Markets will be braced for further volatility on Friday with position adjustment important into the weekend.