EUR / USD
The German ZEW investor confidence index improved to -28.0 for June from -34.3 previously, but marginally below consensus forecasts while the current conditions index posted a slightly stronger recovery to -27.6 from -36.5. The Euro-zone confidence index edged higher to -28.0 from -29.5. There was further hawkish rhetoric from ECB officials with council member Knot stating that it was a real possibility that rate hikes will continue in October and December. He added that if conditions remain as they are now, the bank will need to hike more than 25 basis points in September. He added that he would be comfortable with hiking rates to 1.50%.
The hawkish rhetoric provided an element of Euro support, especially on the crosses, but there were further concerns over rising peripheral bond yields.
The US NFIB small-business confidence index was little changed at 93.1 for May from 93.2 previously. The proportion of companies expecting better business conditions over the next six months declined to a record low while inflation concerns persisted, although the labour market was still tight.
The IBD consumer confidence index retreated to 38.1 for June from 41.2 previously and the lowest reading since 2011.
Following reported guidance through the Wall Street Journal, there were still strong expectations that the Federal Reserve would hike rates by 75 basis points at Wednesday’s policy meeting with Powell also expected to deliver a hawkish stance given the need to control inflation. Markets also expect that there will be further upward revisions to interest-rate projections by individual Fed members. The dollar maintained a strong tone and the Euro dipped to test 1.0400 before a slight recovery.
ECB council member Schnabel stated that further progress is needed in combatting fragmentation. There was a slight dollar correction ahead of the Fed decision and risk appetite attempted to stabilise while the Euro rallied to above 1.0450 after the ECB announced an ad-hoc council meeting to discuss current market conditions.
JPY
US producer prices increased 0.8% for June, in line with expectations while the year-on-year rate edged lower to 10.8% from 10.9%. Underlying prices increased 0.5% on the month with a retreat in the annual rate to 8.3% from 8.6%. The data did not have a significant impact in shifting the market narrative.
Treasuries attempted to rally early in the US session, but there was quick selling on rallies and steady losses with the 10-year yield increasing to near 3.45% and the highest level for over 10 years. Wider dollar strength and higher US yields dominated with the US currency surging to around 135.30 after the European close.
Japan’s monthly Tankan manufacturing survey strengthened to 9 from 5 previously with the services sector unchanged at 13.
Chinese industrial production increased 0.7% in the year to May after a 2.9% contraction previously and above expectations of a further decline while the decline in retail sales was less severe than expected which provided an element of relief. There was no intervention by the Bank of Japan and the dollar secured a 23-year high above 135.50 in Asia before a retreat to below 135.00 in early Europe amid a wider dollar correction with the Euro trading below 141.00.
GBP
Sterling was unable to gain support from the UK jobs release with the data overall suggesting that there were signs of the labour market cooling. Overall sentiment surrounding the UK outlook remained notably pessimistic which continued to undermine currency confidence.
The EU continued to criticise the UK draft legislation to remove parts of the Northern Ireland protocol with comments that the move is damaging to mutual trust and breaks international law. Renewed calls by the SNP for a second Scottish independence referendum also undermined confidence.
Risk appetite was also generally vulnerable which allowed sellers to maintain in control. Sterling dipped to test the 1.2000 level against the dollar and dipped below this level for the first time since March 2020 with lows around 1.1960. The Euro also posted strong gains to highs near 0.8700 as overall Sterling sentiment crumbled. Sterling sentiment remained notably fragile on Wednesday with the UK currency trading just above 1.2000 against the dollar with the Euro just above 0.8700.
CHF
The latest poll by Reuters forecast that the National Bank will hold rates at -0.75% in June before potentially increasing rates in September, although there was caution ahead of Thursday’s policy decision with the potential for a hawkish stance. The Swiss franc secured only limited support from risk aversion during the day and was undermined by higher global yields. The Euro posted net gains to 1.0440 while the dollar broke back above parity to post 4-week highs around 1.0030. There was a slight correction on Wednesday with the dollar trading close to parity ahead of the Federal Reserve policy decision and the Euro around 1.0450.
Technical Levels
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