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EUR / USD

 

The Euro edged higher into Thursday’s ECB policy decision with expectations of a hawkish stance. The ECB held interest rates at 0.0% at the meeting, in line with expectations, and also confirmed that bond buying under the APP programme would end. There was specific guidance for July with the council planning to increase rates by 25 basis points to 0.25%. It also plans to increase rates again in September with the size of the increase depending on the updated inflation outlook.

Bank President Lagarde stated that inflation pressures have broadened while wage growth has started to pick up and that the bank will make sure that inflation gets back on target over the medium term. She added that it was good practice to start with incremental rate increases, especially as it wants to wait for further evidence. There were, however, reports that some members wanted a commitment to a 50 basis-point hike in July.

Following the statement, there was a fresh increase in Euro money-market yields with markets pricing in a total of 150 basis-points of tightening by the end of 2022.

German bond yields moved higher which supported the Euro and, after an immediate slide on the decision, the Euro posted strong gains to highs above 1.0770.

There was, however, a sharper increase in peripheral yields and markets were uneasy over the risk of fragmentation in the Euro area which would risk a renewed debt crisis. In this environment, the Euro surrendered gains, especially with some doubts that the market yields were realistic and there are splits within the ECB. 

Euro losses accelerated as risk appetite deteriorated and it dipped to lows close to 1.0600 against the dollar. Risk sentiment remained vulnerable on Friday with the Euro securing a slight recovery to 1.0630. Position adjustment and reaction to the US inflation data will lead to choppy trading conditions later in the day.

 

JPY

 

US initial jobless claims increased to 229,000 in the latest week from a revised 202,000 the previous week and above consensus forecasts of 210,000 while continuing claims were unchanged at 1.31mn. There was still confidence in the US labour market while the Administration hopes that services demand will help cap inflation.

There was choppy trading in Treasuries following the US data and ECB press conference with net losses as the 10-year yield advanced to above 3.05%. Risk appetite was less confident as equities moved lower with fresh concerns over Chinese coronavirus trends amid a setback in Shanghai. The Wall Street slide provided an element of yen protection but the dollar secured net support on yield grounds with a fresh move above the 134.00 level.

The latest US consumer prices data will be important for market sentiment on Friday with the potential for renewed fears if the data is a stronger than expected release.

China confirmed that there will be mass coronavirus testing in 7 of the 16 districts over the weekend, although producer prices inflation slowed to a 14-month low.

Japan continued to warn over the need for currency stability, but declined to comment on the potential for intervention. Comments from Japan will be monitored closely and the wider G7 rhetoric on currencies will also be potentially important. The dollar retreated to around 133.75 from highs at 134.50 as equities attempted to stabilise.

 

GBP

 

There were no major UK data releases during Thursday as global developments tended to dominate. Prime Minster Johnson’s raft of policy proposals provided a slight element of support, although the overall impact was limited as underlying confidence in the UK outlook remained notably fragile, especially with further upward pressure on retail fuel prices.  There were also underlying reservations over Brexit tensions and the risk of a trade war with the EU.

Sterling found support below the 1.2500 level against the dollar and was broadly resilient for much of the day despite weaker equity markets. A strong US currency and sharp Wall Street decline did sap support later in the day with a dip below 1.2500 against the dollar and it traded just below this level on Friday.

The Euro retreated to re-test support below the 0.8500 area before trading just above this level. Political developments will be monitored over the weekend with the Brexit trade Bill due to be published on Monday, although global risk conditions are liable to have a larger Sterling impact at this stage.

 

CHF

 

The Swiss franc was able to resist further net losses during Thursday despite higher bond yields in the US and Germany. There were fresh reservations over the risk of a Euro-Zone debt crisis which provided an element of franc support amid fresh demand for the currency on defensive grounds was also a significant factor. The Euro retreated to lows near 1.0400 while the dollar secured a slight net advance in choppy conditions.

The Euro stabilised on Friday, but risk appetite remained vulnerable while the dollar traded just below the 0.9800 level.

 

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