EUR / USD
ECB chief economist Lane stated that the increase in household inflation expectations is a concern and it is appropriate to normalise monetary policy. He added that the speed of monetary policy moves after the third quarter will be decided depending on the economy.
Council member Knot stated that inflation expectations are at the upper limit of being well anchored and that a 50 basis-point rate hike isn’t off the table.
Nevertheless, markets were sceptical that a majority on the council would back such a move and the Euro was unable to gain further support given that expectations have already been adjusted sharply. Overall, the Euro lost ground with a dip below 1.0700 against the dollar leading to further selling interest and lows just below 1.0650 as Wall Street equity futures retreated and risk appetite was less confident. The Euro steadied ahead of the Fed minutes as US equities moved into positive territory.
Minutes from May’s Federal Reserve policy meeting confirmed that all participants backed a 50 basis-point rate increase and most backed further 50 basis-point hikes at the next two meetings with the central bank needing to move expeditiously to neutral. The minutes also noted that inflation risks were skewed to the upside and policy may need to be restrictive, although there was a high degree of uncertainty. Participants also noted that the Fed should assess risks to the economy later this year.
The rhetoric maintained the possibility that there could be a pause in rate hikes after July and the dollar edged lower. The Euro edged back above 1.0700 in early Asia on Thursday, but failed to sustain the move and retreated to around 1.0675 amid slightly lower global equity markets.
US Treasuries posted renewed gains ahead of Wednesday’s New York open with the 10-year yield retreating to 4-week lows around 2.73%. The dollar had pushed to highs close to 127.30 against the yen before fading. US durable goods orders increased 0.4% for April after a revised 0.6% gain the previous month and slightly below consensus forecasts. Underlying orders increased 0.3% for the month after a 1.1% gain the previous month and the overall market impact was limited.
There was a further net shift in expectations surrounding Fed policy with futures not fully pricing in two 50 basis-point rate hikes by July. The yen was, however, unable to gain further support and the dollar consolidated around 127.30 at the European close.
US yields were marginally high after the Fed minutes, although equities posted net gains and the dollar was little changed amid a consolidation phase.
China developments were mixed with a warning from aggregated indicators of a steep downturn, but there were reports that the port of Shanghai was back to 95% of capacity which would provide some relief to global supply chains. Equities drifted lower, although the dollar traded around 127.40 against the yen.
Bank of England chief economist Pill stated that further interest rate increases are needed, but he added that too much tightening would increase the risk of deep recession which would be very costly. The comments maintained doubts over the scope for more than limited rate hikes.
Sterling moves during the European session were influenced to an important extent by risk conditions with the currency losing ground as equities moved lower. The UK currency again found support below 1.2500 against the dollar and recovered to 1.2550 ahead of the Fed minutes with the Euro retreating sharply to just below 0.8500.
Bank of England external member Tenreyro stated that the bank faces a fine balance when setting rates because aggregate demand will be depressed and the mandate required the bank to look at the medium-term outlook and avoid actions which cause inflation to significantly undershoot the target. Sterling was resilient despite a dovish slant to Tenreyro’s rhetoric and it traded above 1.2550 against the dollar.
Markets are expecting Chancellor Sunak to announce a support package on Thursday of at least £10bn to ease the cost of living crisis. This will provide an element of support for the economy and potentially give the Bank of England increased scope for higher interest rates with Sterling trading around 1.2565 against the dollar.
The Swiss ZEW expectations index declined slightly to -52.6 for May from -51.6 the previous month which will maintain some concerns over the outlook, although with little market impact. National Bank Chair Jordan stated that the global economy is moving into a tightening phase. There was some speculation that the central bank could increase interest rates at the June meeting given that the bank only holds quarterly meeting.
The Euro retreated to the 1.0270 area with the dollar securing a tentative net advance to 0.9630 with little net change on Thursday.