EUR / USD
German industrial production increased 0.7% for April after a revised 3.7% decline the previous month, but marginally below consensus forecasts. The first-quarter Euro-zone GDP estimate was revised up to 0.6% from the flash estimate of 0.3% with year-on-year growth of 5.4% from 4.7%.
Ahead of Thursday’s ECB policy meeting, there was a further increase in market expectations surrounding interest rates with futures markets pricing in 200 basis-point increases by May 2023. The shift in expectations was significant in supporting the Euro ahead of Wednesday’s New York open with a move above 1.0700 against the US currency. There were no major US developments during the day ahead of Friday’s consumer prices release.
ECB expectations continued to underpin the Euro after the US open with traders reluctant to sell the currency ahead of Thursday’s policy meeting. There are no expectations for a rate hike at this meeting, but the bank is expected to give clear forward guidance that there will be an increase in July with bond purchases ending this month. The Euro posted notable gains on the crosses and also posted net gains to 1.0740 against the dollar with resistance close to 1.0750.
The Euro drifted lower to 1.0720 on Thursday with a firm overall dollar tone in global markets and there will be further Euro volatility after the ECB policy meeting.
JPY
The yen remained firmly on the defensive after Wednesday’s European open with traders continuing to sell the Japanese currency amid the underlying widening of yield spreads. There were also report that the Bank of Japan would downgrade its assessment of industrial output due to Chinese lockdowns.
Treasuries dipped lower at the New York open with the dollar surging to highs around 134.50 as US yields moved higher. There was a limited retreat in US yields towards the European close which triggered a limited correction, but the dollar held above 133.50.
Treasury Secretary Yellen stated that there was no way that inflation would be a decade-long problem. There were also suggestions that the US will look to adjust tariffs on China to help ease near-term inflation pressures which provided a minor lift to risk sentiment, although Wall Street equities still closed lower.
There will be an element of caution ahead of Friday’s US CPI release with markets also monitoring inflation expectations.
China’s trade surplus was stronger than expected for May with exports beating expectations with 15.3% annual growth while imports remained subdued with 2.0% growth. Overall risk conditions were relatively cautious with further unease over the impact of elevated energy prices.
Markets remained on alert for any Japanese intervention to curb yen weakness, but there was no sign on official action. The dollar posted a fresh 20-year high just above 134.50 against the yen before settling around 133.85 in early Europe with the Euro at fresh 7-year highs above 144.00 before a limited correction.
GBP
The UK PMI construction index declined to a 4-month low of 56.4 for May from 58.2 previously and slightly below consensus forecasts. Overall business confidence dipped to the lowest level since August 2020, but there was a further increase in orders and there was a slight easing of inflation pressures as supply-side pressures eased slightly. Overall sentiment towards the UK outlook remained weak as high energy costs continued to sap support amid expectations of weak consumer spending.
At the latest gilt auction, the 10-year yield increased to near 2.30% and the highest reading for over 7 years. Higher yields proved an element of Sterling support, but overall Sterling confidence remained weak which limited potential support, especially with most central banks raising interest rates.
Sterling found support above 1.2500 against the dollar and recovered to around 1.3550, but the Euro posted net gains to just above 0.8550.
There will be scope for an element of short covering ahead of next week’s Bank of England policy decision. Overall confidence in the UK outlook remains notably weak and the RICS data indicated a limited slowdown in the housing sector. Sterling was held around 1.2520 against the dollar on Thursday with the Euro around 0.8560.
CHF
The Swiss franc remained on the defensive during Wednesday with global yield trends dominating markets. Swiss negative rates sapped support, especially with a further increase in Euro money markets during the day. There was still an element of caution ahead of next week’s National Bank policy meeting.
The Euro posted net gains to near 1.0500 before a limited retreat while the dollar secured a limited net advance to near 0.9750. The franc remained on the defensive on Thursday with the Euro holding just below the 1.0500 level while the dollar edged higher to 0.9780.
Technical Levels
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