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EUR / USD

 

US consumer prices increased 1.0% for May compared with a forecast of a 0.7% increase with the year-on-year rate increasing to 8.6%. This was significantly above consensus forecasts that the rate would remain at 8.3% and also the highest rate since early 1982. Food prices increased 1.2% on the month with an annual increase of 10.1% while energy prices jumped 3.9% for May with an annual increase of 34.6%. Within the energy sector, fuel oil prices increased over 100% on the year.

The core annual rate declined to 6.0% from 6.2%, although this was also slightly above market expectations of 5.9%. There was resumption in price increases for used vehicles with price increases across all major sectors which increased fears that inflation would be very slow to subside.

Following the inflation data, there was a fresh shift in Federal Reserve pricing with markets pricing in 150 basis-points in tightening for the next three Fed meetings and there was also speculation that there would be a more aggressive 75 basis-point increase to 1.75% at this week’s meeting. Markets also priced in a Fed Funds rate of close to 3.00% at the end of 2022. The 2-year bond yield increased to 3.0% for the first time since 2008 which had an important market impact.

The shift in Fed expectations and higher yields triggered further dollar buying with the Euro sliding to lows near 1.0500 as Euro-zone confidence remained fragile.

There were strong gains for left-wing candidates in the first round of French parliamentary elections with President Macron’s party potentially losing its majority in the second round. Risk appetite also deteriorated further on Monday with the Euro trading below 1.0500 and close to 1.0480 amid on-going dollar strength.

 

JPY

 

The latest data recorded a strong rebound in Chinese new loans growth to CNY1890bn from CNY645bn the previous month and well above expectations of CNY1300bn with total social financing surging CNY2,790bn from CNY910bn previously which will help stabilise sentiment towards the Chinese outlook. 

US Treasuries came under heavy selling pressure after the latest US inflation data with the 10-year yield increasing sharply to around 3.13% and near 3-year highs.

The University of Michigan consumer confidence index declined sharply to 50.2 for June from 58.4 the previous month. This was well below consensus forecasts of 58.0 and also the weakest reading on record. The one-year inflation expectations index increased to 5.4% from 5.3% with 5-year expectations strengthening to 3.3% from 3.00%. The survey indicated that higher inflation was having an important impact in undermining confidence.  The dollar held a firm tone with the dollar close to 134.40.

US yields continued to increase on Monday with the 10-year yield at fresh 3-year highs close to 3.20%. Equities were vulnerable, but the yen continued to lose ground. Chief Cabinet Secretary Matsuno stated that yen weakness was a concern and Japan was ready to respond as appropriate. The yen, however, remained vulnerable and the dollar continued to post gains and hit fresh 20-year highs above 135.00 before consolidating close to this level.

 

GBP

 

The latest Bank of England data recorded an increase in 1-year inflation expectations to 4.6% from 4.3% which will maintain concerns within the central bank that inflation expectations will become de-anchored. This will maintain pressure for the central bank to tighten policy further to rein in inflation.

Sterling was unable to make any headway after the data and posted sharp losses after the US inflation data. The UK currency declined very sharply to lows close to 1.2300 against the dollar as strong US gains and a slide in risk appetite caused major damage. The Euro also posted net gains to 0.8540.

CFTC data recorded a  further decline in short non-commercial Sterling positions to just below 71,000 in the latest week from over 74,000 previously. There will still be scope for further short covering, but only if there is a shift in Sterling sentiment.  

Vulnerable risk conditions undermined Sterling on Monday. Latest UK GDP data recorded a 0.3% decline for April compared with expectations of a slight increase with industrial production dipping on the month. The data reinforced a lack of UK confidence with Sterling losses to near 1.2250 against the dollar and the Euro near 0.8550.

 

CHF

 

The Swiss franc was underpinned to a limited extent by weaker risk conditions on Friday, although the currency struggled to gain significant support. The franc was undermined by higher global yields after the US CPI data. The Euro dipped to lows below 1.0380 before a recovery to just above 1.0400 while the dollar posted strong gains to near 0.9900. There will be a significant element of caution ahead of Thursday’s National Bank policy meeting.

Risk appetite remained more vulnerable on Monday which helped underpin the franc while the dollar traded just below the 0.9900 level.

Technical Levels 

Contents

Disclaimer

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