EUR / USD
German factory orders declined 2.7% for April after a revised 4.2% fall the previous month and much weaker than consensus forecasts of a small increase. The June Euro-zone Sentix index, however, recovered to -15.8 from -22.6 previously and compared with market expectations of -20.0.
The Euro was unable to draw support from the data releases and edged lower as high US yields continued to dominate.
The April total trade deficit declined to $87.1bn from a record $107.7bn the previous month with a sharp decline in imports for the month while exports increased to a record high. The sharp deficit decline will lead to an upward revision to second-quarter GDP estimates.
The Euro posted lows close to 1.0650 against the dollar, but gradually regained ground as US yields retreated. Equity markets also managed to recover ground with the Euro recovering to the 1.0700 area after the European close, although there was still a lack of confidence in moves.
There will be further caution ahead of Wednesday’s ECB policy meeting with forward guidance from the bank very important ahead of the July meeting when interest rates are expected to increase. In particular, markets will be looking for hints on whether a larger 50 basis-point rate hike could be under consideration.
US rates moved higher again on Wednesday which triggered fresh dollar demand and the Euro edged lower, but was resilient as choppy trading continued.
In comments on Tuesday, Japanese economy minister Yamagiwa stated that he was closely watching the impact of forex moves on the economy. The rhetoric had little market impact with the dollar continuing to test the 133.00 level ahead of the New York open.
Treasuries did rally after the US open and buyers remained in control with the 10-year yield retreating to near 2.95%. Lower yields were significant in undermining the dollar and adding to pressure for a correction with the US currency retreating to the 132.50 area at the European close.
The Federal Reserve will remain in the blackout period ahead of the June 15th policy decision which is likely to contribute to volatile trading conditions.
There is also likely to be further choppy trading ahead of Friday’s important CPI inflation release with the headline rate expected to remain at 8.3%.
In comments on Wednesday, China’s vice commerce minister stated that trade faces uncertainties and huge pressures which triggered fresh reservations over supply-side difficulties. US Treasury Secretary Yellen also warned that inflation was liable to stay high and US yields moved higher again in Asia. The dollar posted renewed gains and traded at fresh 20-year highs around 133.20 against the yen with the Euro at 7-year highs above 142.00.
The final May UK PMI services index was revised higher to 53.4 from the flash reading of 51.8, although this was still a sharp slowdown from the April reading of 58.9 and the lowest reading for 15 months. The rate of increase in costs was the strongest since the survey started in 1996 and price charged by service providers also increased at the fastest pace on record. The strong inflation pressures were a contributory factor to a decline in business confidence.
There were further concerns that political uncertainty would be prolonged, although some reports of an economic support package helped curb selling pressure.
After sliding early in Europe, Sterling was able to find support below 1.2450 against the dollar and rallied quickly to the 1.2500 area.
The UK 10-year gilt yield held close to 8-year highs on Tuesday which helped underpin the currency. After initial vulnerability, risk appetite also recovered which helped underpin the UK currency and triggered a fresh round of short covering. Sterling posted net gains to highs at 1.2600 against the dollar while the Euro retreated to test 0.8500 from highs at 0.8580. Conditions were less confident again on Wednesday and Sterling retreated to near 1.2570 against the dollar.
Swiss sight deposits declined to CHF753.8bn in the latest week from CHF754.0bn the previous week which suggested that the National Bank had not been intervening to restrain the Swiss currency in the latest week.
The franc overall remained on the defensive amid a flow of funds into higher-yield assets, although it pared losses as US yields retreated. The Euro posted net gains to around 1.0410 while the dollar advanced to highs at 0.9780 before a retreat to 0.9720. Dollar moves remained important with a fresh advance to 0.9750 on Wednesday. Markets will remain on alert for any comments from the National Bank ahead of next week’s policy announcement.