EUR / USD
Euro-zone first-quarter GDP increased 0.3% according to the second reading and slightly above forecasts of 0.2% with 5.1% annual growth from 5.0% previously.
ECB council member Knot stated that monetary policy needs to be normalised and a 25 basis-point rate increase is realistic for July. He added that 50 basis-point increases should not be excluded if data in the next few months suggests that inflation is broadening. Hawkish rhetoric continued to underpin the Euro and the single currency continued to gain with short covering in evidence and a break back above 1.0500 triggered another round of short liquidation with a peak just above 1.0550.
US retail sales increased 0.9% for April after an upwardly-revised 1.4% increase the previous month and in line with market expectations. Underlying sales were slightly higher than consensus forecasts with a 0.6% gain and there was a bigger beat for the control group with a 1.0% increase compared with expectations of a 0.5% gain and following a 1.1% increase the previous month. The data had little net impact with the Euro holding above 1.0500 at the European close.
Fed Chair Powell stated that the central bank knows this is a time for a laser-focussed approach on bringing inflation down and on-going rate increases are appropriate with a broad consensus on the committee that 50 basis-point increases will be on the table at the next couple of meetings. The economy also needs growth to slow so that the supply side can catch up. If there’s convincing evidence that inflation is slowing the rate of rate hikes can slow, but the Fed will have to act more aggressively if not and won’t hesitate to go beyond neutral if necessary. Powell also expressed a high degree of uncertainty, especially given the Ukraine war.
The comments were relatively hawkish with the dollar slightly firmer, although ranges were narrow. This pattern continued on Wednesday with the Euro around 1.0530.
JPY
US industrial production increased 1.1% for April with manufacturing output increasing 0.8% and both figures were comfortably above consensus forecasts. The May NAHB housing index retreated to 69 from 77 previously and below expectations of 75 as higher yields started to bite and supply-side difficulties continued.
St Louis Fed President Bullard stated that 50 basis-point rate increases are a good base case for the next few meetings. US yields moved higher again following Powell’s comment with the 10-year yield increasing to just above 2.95%. The dollar consolidated around 129.25 as equities pared gains.
Chicago head Evans stated that interest rates needed to be increased to 2.25-2.50% quickly with front-loaded hikes and rates may need to move somewhat above the neutral rate, although he did express hope that rate hikes can slow from the third quarter.
Japan’s Tankan manufacturing index dipped to 5 for May from 11 previously and the lowest reading since February 2021, but there was a recovery in the services sector. Risk appetite was less confident during the Wednesday’s Asian session with the dollar just above the 129.0 level and Euro around 136.0.
GBP
Sterling maintained a firm tone after the UK labour-market data with the evidence of a tight labour market and strong upward pressure on private-sector wages increasing expectations that the Bank of England would take a more aggressive stance on interest rate hikes.
The UK currency also gained support from a firmer tone surrounding risk appetite with the currency rebound also triggering further short covering.
There were underlying reservations over Brexit developments and government plans to introduce legislation to over-ride parts of the Northern Ireland protocol, although the market reaction was measured with hopes that negotiations will continue. Overall, the UK currency maintained momentum during the day and advanced to a peak close to 1.2500 against the dollar before consolidating below this level. The Euro dipped sharply to just below 0.8400 before a recovery to 0.8440.
The headline UK inflation increased to 9.0% for April from 7.0% and the highest reading for 40 years, but slightly lower than the expected rate of 9.1%. Markets had been braced for an even higher figure and there was a slight Sterling correction with the currency around 1.2470 against the dollar and the Euro around 0.8445.
CHF
The Swiss franc was broadly resilient on Tuesday, although there were significant moves on individual pairs. The franc managed to resist selling pressure despite hawkish rhetoric from central banks with the National Bank expected to maintain extremely low interest rates.
The Euro found support on dips and edged higher to 1.0470, but the dollar dipped back below parity and retreated sharply to lows near 0.9920 before stabilising.
The dollar found support on dips and advanced to just below 0.9950 on Wednesday with central bank rhetoric remaining under close scrutiny.
Technical Levels
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