EUR / USD
There was further hawkish rhetoric from ECB officials with council member Kazimir stating that there was a clear need for a 50 basis-point rate hike in September. The Euro was unable to gain support from higher yields amid concerns over the risk of a surge in peripheral yields and fragmentation risks. In this context markets were monitoring Italian yields closely and the 10-year yield hit 4.0% on Monday for the first time since 2014 and an increase from 3.50% since the ECB policy meeting last week. Higher peripheral yields will increase fears over a fresh debt crisis and potentially constrain ECB policy action.
The dollar continued to gain net support from expectations that the Federal Reserve will have to be more aggressive in raising interest rates to stem inflation pressure. There was further speculation that there would be a 75 basis-point rate hike at this week’s policy meeting with a notable shift in investment bank expectations.
Early in the day, futures markets indicated a 30% chance of a 75 basis-point hike this week and over an 80% chance of such a move at the July meeting. There was a further dramatic shift by the New York close with futures indicating over a 95% chance of a 75 basis-point hike this week which boosted the dollar.
Weaker risk appetite was also an important factor undermining Euro support while the dollar secured important defensive demand. In this environment, the Euro dipped to lows just below 1.0400. The dollar index also posted a marginal new 19-year high just above the 105.00 level before a slight correction. The Euro attempted to stabilise on Tuesday and traded around 1.0430. There will be further choppy trading ahead of Wednesday’s Fed policy decision.
JPY
Overall risk appetite deteriorated further during Monday with further concerns over the US and global outlook. US Treasuries continued to lose ground during the day with sustained selling pressure amid inflation fears. The 10-year yield increased to highs near 3.35% after the US open which was the highest level for over 10 years before a limited correction later in the day. The yen gained significant support from weaker equities and the dollar dipped to lows around 133.60. Higher yields still provided underlying dollar support and the US currency recovered to above 134.00 despite further losses on Wall Street.
There was some speculation that the Chinese central bank will cut interest rates this week which helped underpin risk conditions to some extent during the Asian session, although overall confidence remained fragile given reservations over the global economy.
The Bank of Japan continued to intervene to cap bond yields and managed to hold the 10-year rate at 0.25% and overall yield spreads continued to undermine the yen.
There was no intervention to cap yen losses and the dollar traded around 134.70 in early Europe on Tuesday with the Euro above the 140.00 level against the yen.
GBP
Sterling remained under pressure after Monday’s European open with the latest GDP data continuing to sap confidence amid increased fears over the risk of UK recession. The latest trade data also undermined sentiment given on-going fears over a decline in trade volumes to the EU and the risk of a trade war with the EU.
Sterling was hurt by a renewed slide in risk appetite during the day, especially with fears over the UK balance of payments position. Sterling dipped sharply to lows around 1.2125 before a recovery towards 1.2200 while the Euro posted strong gains to near 0.8600 before a retreat to 0.8565.
The UK published its plans to remove part of the Northern Ireland protocol. In response the EU called for the UK to negotiate, but will also look at starting legal action.
There will be an element of caution ahead of Thursday’s Bank of England policy announcement with the potential for short covering.
The UK labour-market data was mixed as the unemployment rate increased to 3.8% from 3.7% for the latest 3-month period. Headline average earnings growth was weaker than expected at 6.8% from 7.0% while underlying growth held at 4.2% which may deter aggressive Bank of England action. Risk appetite attempted to stabilise on Tuesday, but Sterling remained fragile as it traded below 1.2200 against the dollar with risk conditions remaining extremely important.
CHF
Total Swiss sight deposits declined to CHF753.1bn in the latest week from CHF753.8bn the previous week which indicated that the National Bank had not been intervening to weaken the Swiss currency in the latest week.
Weaker risk conditions provided an element of support to the franc during Monday, but this was offset by higher global bond yields. The Euro consolidated just below 1.0400 from lows near 1.0360 while the dollar posted a strong net advance to 0.9950 after hitting resistance close to 0.9980 and traded around 0.9960 on Tuesday.
Technical Levels
