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The Euro continued to post gains in early Europe on Wednesday following reports that the ECB was holding an emergency meeting to discuss recent market moves in bond markets. The dollar was also subjected to a significant correction and there was a Euro peak above 1.0500. There was, however, also a paring of July ECB rate expectations with 30 basis-points of tightening priced in from 42 basis points the previous day which curbed Euro support on the crosses.

The ECB announced that it would skew bond re-investments of maturing debt to help more indebted countries and will also speed up development of a new tool to stop fragmentation. There was a decline in peripheral yields following the move, but the Euro failed to benefit as it retreated to lows below the 1.0400 level.

The Fed increased the Fed Funds rate 75 basis points to 1.75% which came as little of a surprise after the effective briefing on Monday. The usually hawkish Kansas City head George dissented and called for a 50 basis-point hike. The Fed noted that it is highly attentive to inflation risks and rates are expected to increase further.

After the largest hike for over 30 years, there was a big shift in rate projections from individual members with the median projection that rates will be at 3.4% at the end of this year from 1.9% at the March meeting. The end-2023 median rate was also increased to 3.8% from 2.8%, but rates are expected to edge lower in 2024.

Chair Powell stated that it was essential to bring inflation down and that on-going rate increases are appropriate, especially as inflation risks have increased.

Powell did see evidence that the housing sector is softening and he expects the labour market to move into better balance with higher unemployment.

He added that the July decision was liable to be a choice between 50 or 75 basis points while the short-term neutral rate is likely to be 3.00-3.50%.

The dollar made initial gains after the decision before losing some ground during Powell’s press conference. There were some hopes that front-loading rate hikes would allow an earlier peak in rates. There was some paring of long dollar positions and the Euro rallied to highs at 1.0470 before a retreat to 1.0430 on Thursday.




US retail sales declined 0.3% for May after a downwardly-revised 0.7% gain the previous month and below consensus forecasts of a 0.3% increase. Underlying sales increased 0.5% on the month with the control group unchanged for the month. The data is not adjusted for prices which suggests weak volumes.

The New York Empire manufacturing index improved to -1.2 from -11.6, but slightly below consensus forecasts of 2.4. There was a rebound in new orders for the month, but unfilled orders declined on the month. Prices and employment indices were mixed on the month while companies were slightly less optimistic over the outlook.

Treasuries reversed initial losses during Powell’s comments and the dollar retreated to below 134.00 against the yen from highs above 134.50 in choppy trading.

Japan posted the second-largest trade deficit on record for May as the weak yen put upward pressure on imports. Markets still expect that the Bank of Japan will maintain a very dovish policy stance, although there will be some pressure for the central bank to adjust policy at Friday’s policy meeting and some speculation that the bank will allow bond yields to move higher which would support the yen. The dollar posted net gains to around 134.25 in early Europe on Friday.  




Sterling was able to secure an element of short covering on Wednesday with an element of position adjustment ahead of the Bank of England policy meeting. A steadier tone surrounding risk appetite also helped curb potential Sterling selling with the currency over-sold after heavy losses.

Sterling held steady into the Fed policy decision and moved higher as the dollar lost some traction. After heavy gains during Wednesday, the Euro dipped sharply from highs above 0.8720 to trade just below 0.8600. The Bank of England is expected to increase interest rates to 1.25% in order to combat inflation, but there is a high degree of uncertainty, especially with expectations of major splits within the committee. Forward guidance will also inevitably be important for Sterling moves. From highs above 1.2200 against the dollar, Sterling retreated to just below 1.2150 in early Europe with high volatility inevitable and overall global risk trends will also be important.




Markets expect the National Bank to hold interest rates at -0.75% at the latest policy meeting, but are braced for a potential surprise and expect more hawkish forward guidance, especially given elevated inflation. In this context, the franc was able to resist selling pressure during Wednesday despite a net improvement in risk appetite. The Euro failed to challenge 1.0500 and retreated to just below 1.0400 on Thursday. Global yield trends remained important and the dollar traded around 0.9960 after failing to hold above parity.  There will be volatile trading after the bank’s policy decision with wider volatility also remaining higher.   

Technical Levels 




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