EUR / USD
ECB council member Rehn stated that it was very likely that the September rate hike will be bigger than 25 basis points. Markets continued to price in around 75 basis points of tightening for the July and September meetings combined. In this context, the rhetoric provided only limited Euro support.
The German gas regulator stated that the gas situation is tense, but stable and reiterated its call for the country to save as much gas as possible. There were underlying reservations over the outlook for energy prices, especially as there will be a negative impact on the Euro-zone economy. The BDI added that there was a recession risk in Germany as the Russian gas crisis intensified. The Euro advanced to highs just above 1.0580 against the dollar before fading.
Richmond Fed President Barkin stated that he had thought that a 75 basis-point rate hike was possible at the June meeting after the latest University of Michigan consumer confidence index recorded an increase in long-term inflation expectations to 3.3% from 3.0%. He added that there was not much reason to stop raising interest rates if inflation keeps escalating. He added that the Fed will do what it takes to reduce inflation and it should come down, but it will take some time.
Narrow ranges prevailed later in the day with the Euro settling around 1.0530. The dollar secured fresh support from weaker risk appetite on Wednesday with the Euro dipping to just below 1.0500 despite a sharp decline in oil prices with comments from Fed Chair Powell watched closely later in the day.
There were no major moves in Treasuries ahead of Tuesday’s New York open, but US yields edged higher. The dollar gained fresh support and a break above the previous high around 135.50 triggered a fresh round of buying and the US currency surged to highs around 136.30 as the yen posted sharp losses on the crosses.
Markets continued to monitor political developments with the Administration still considering whether to sanction a cut in gasoline taxes to help curb inflation pressures. There was also further speculation that there would be a cut in tariffs on Chinese imports and President Biden is expected to make an announcement on Wednesday.
The dollar posted a further advance to fresh 24-year highs around 136.70 as US equities posted strong gains.
Risk appetite was more fragile in Asia on Wednesday with US yields edging lower. The Bank of Japan remains committed to a very loose monetary policy which undermined potential yen support, but there was some protection from weaker risk appetite and a fresh dip in oil prices.
In this environment, the dollar retreated to 137.30 and the Euro also retreated from close to 7-year highs.
In comments on Tuesday, Bank of England Chief Economist Pill stated that he sees further policy tightening in monetary policy with the bank ready to act if there is evidence of persistent price pressures, although he added that the bank faces a narrow path between persistent inflation pressure and recession. As far as Sterling is concerned, Pill stated that he was worried that using monetary policy to stabilise the exchange rate in the short term would distract the bank from its goals. Following Mann’s comments on Monday, there was still speculation that the bank could raise rates faster to help curb imported inflation and curb wage settlements.
Sterling posted solid gains after the European open with a move to above 1.2300 against the dollar with further short covering.
The CBI industrial orders index retreated to 18 for June from 26 in May and slightly below expectations of 22 with solid growth in output, although with signs of a net slowdown. There was a significant moderation in expectations surrounding prices growth with the lowest reading since September 2021.
The UK currency was unable to sustain the gains as underlying sentiment towards the economic outlook remained weak, but held around 1.2270.
The UK CPI inflation rate met expectations with an increase to 9.1% from 9.0%, but the underlying rate declined slightly more than expected to 5.9% from 6.2%.
Weaker risk appetite tended to sap Sterling support as it traded around 1.2230 against the dollar with the Euro little changed around 0.8585.
The Swiss franc was resilient during Tuesday with further notable out-performance compared with the yen as the National Bank move to tighten monetary policy last week continued to provide net support. The franc also resisted losses despite firm risk appetite and gains in equities.
The Euro settled around 1.0180 against the franc while the dollar settled around 0.9670. Weaker risk appetite provided an element of franc support on Wednesday with the Euro retreating to 1.0160 while the dollar traded around 0.9680 as markets continued to monitor risk conditions.