EUR / USD
Euro-zone industrial sentiment dipped to 6.3 for May from a revised 7.7 previously while there was a slight improvement in services-sector confidence to 14 from 13.6. Overall business and consumer confidence improved marginally to 105.0 from a revised 104.9 in April.
German consumer prices increased 0.9% for May with the annual inflation rate strengthening to a fresh post-unification record high of 7.9% from 7.4% and above consensus forecasts of 7.6%. Inflation has also been equal to or above market expectations for the past 8 months.
ECB chief economist Lane stated that the central bank should increase interest rates by increments of 25 basis points in July and September and that it was appropriate to end negative rates by the end of the third quarter. The rhetoric was in line with market expectations.
At this stage, there is clear evidence that key ECB officials are opposed to a rate hike of 50 basis points at any individual meetings, limiting scope for further Euro buying.
There were also reports that ECB officials are opposed to intervention to support the Euro even if there is a slide below parity against the dollar.
The Euro maintained a firm overall tone and strengthened to fresh 1-month highs around 1.0780 at the European close. Risk appetite was less confident in Asia on Tuesday while the EU announced that it had reached a compromise deal on an embargo on Russian oil imports with a cut of close to 90% expected by the end of this year. The Euro retreated to just below 1.0750 as the dollar recovered and month-end position adjustment could be a significant element later on Tuesday.
Chinese vice-premier Liu stated on Monday that the economy and supply chains would be stabilised which had some impact in support risk appetite. Bond markets were closed on Monday with Treasury futures marginally lower as the 10-year yield traded around 2.74%. US equity futures held in positive territory, but failed to extend gains.
Fed Governor Waller stated that inflation is alarmingly high and that he backed raising interest rates by 50 basis points at several meetings and until inflation comes closer to the Fed’s 2% target. He added that the policy rate should be above neutral by year-end. These comments were stronger than the Fed consensus view.
The hawkish rhetoric tended to undermine the yen and the dollar strengthened to highs at 127.80 before a retreat to near 127.50.
China’s manufacturing PMI index recovered to 49.6 for May from 47.4 previously while the non-manufacturing index recovered to 47.8 from 41.9. Both figures were above expectations, but still in contraction territory. There are expectations of a further Chinese recovery in June as lockdowns are eased. Wider dollar gains dominated with the US currency advancing to around 127.70 at the European open from highs around 128.30.
The latest YouGov survey recorded an increase in UK inflation expectations for the year ahead to 6.1% from 6.0% and equalling the record high while long-term expectations held at 4.2%. The data will maintain pressure for the Bank of England to tighten monetary policy in order to curb inflation expectations.
There were still important doubts whether the bank would be able to match the scale of rate increases by the Federal Reserve and ECB over the next few months.
Overall risk conditions held steady which helped underpin the UK currency, although overall sentiment remained fragile
Sterling edged higher to just above 1.2650 against the dollar at the European close with the Euro posting a limited net advance to near 0.8520.
The latest Lloyds Bank business confidence data recorded a net gain for May which will provide some relief, but overall confidence in the economy remains negative. Sterling retreated to near 1.2600 against the firmer dollar with the Euro little changed. Markets will be wary of choppy trading later on Tuesday due to month-end position adjustment with risk appetite and political developments also under scrutiny during the day as pressure on Prime Minister Johnson continues to increase gradually.
The Swiss KOF business confidence index retreated to 96.8 for May from a revised 103.0 previously and below consensus forecasts of 102.3.
Total Swiss sight deposits declined marginally to CHF754bn in the latest week from CHF754.1bn the previous week which suggested that the National bank had not been engaged in significant intervention to restrain the franc during the week.
The franc was unable to make headway with the Euro strengthening to 1.0320 while the dollar was little changed around 0.9575. The dollar advanced to near 0.9600 on Tuesday with markets continuing to monitor risk and yield trends as well as any rhetoric from the National Bank.