EUR / USD
The German IFO business confidence index dipped t92.3 for June from 93.0 previously and below expectations of 92.9. The current assessment was marginally above expectations with a slight decline to 99.3 from 99.6, but there was a steeper retreat in the expectations component to 85.8 from 86.9.
The IFO stated that worry lines in Germany are getting bigger with a significant dip in morale in industry and retail. Expectations are also getting more pessimistic, although there is no sign of recession at the moment. German yields continued to edge lower on the day and money markets also moved to price out some ECB tightening with 150 basis points of rate hikes priced in by the end of 2022 from 170 basis points last week.
The dollar maintained a slightly less confident tone during the day as Fed expectations were also priced out and, although the Euro was unable to hold its best levels, it posted further net gains late in the day as equities extended gains and settled around 1.0550 against the US currency as defensive dollar demand faded.
CFTC data recorded an increase in short Euro positions to over 15,000 contracts in the latest week and the largest short position since late 2021.
Overall confidence in the global economy will remain fragile with the BIS warning that there is a real risk of stagflation. These concerns will tend to limit the scope for dollar selling, but the Euro edged higher to 1.0560 on Monday with Fed and ECB rhetoric under rhetoric during the day.
The US final June reading for the University of Michigan consumer confidence index came in at 50.0 from the flash reading of 50.2. The 1-year inflation expectations index edged lower to 5.3% from the flash reading of 5.4% while the 5-year index retreated to 3.1% from the flash reading of 3.3%.
Revision to inflation expectations triggered fresh doubts over aggressive Fed tightening. St Louis Fed President Bullard inflation will come down if all goes to plan while the front-loading of rates is a good idea in this situation. He added that he would like rates to increase to 3.5% by the end of this year. Overall, there was a limited shift in expectations surrounding the July policy meeting with markets pricing in around a 30% chance that the July rate hike would be held to 50 basis points.
US new home sales increased to an annual rate of 696,000 for May from a revised 629,000 previously and well above expectations of 588,000.
The dollar struggled to make much headway, but did manage to trade just above 135.00 at the European close as US equities posted a strong advance.
CFTC data recorded a decline in short yen positions to below 60,000 contracts and the smallest short position for over 3 months.
Over the weekend, San Francisco Fed President Daily stated that markets have priced in a 75 basis-point increase for the July meeting and that the Fed should get that increase in. There was still an important element of uncertainty, especially given the dip in inflation expectations from the flash data.
The dollar was unable to make any headway on Monday and it traded back just below 135.00 against the yen with the Euro around 142.30.
In comments on Friday, Bank of England chief economist Pill stated that the high level of inflation stemmed mainly from external shocks, but there was a risk that higher headline inflation could lead to second-round effects. The overall impact was limited with markets waiting for further guidance.
Sterling was broadly resilient during the day, especially given the firm tone in risk appetite and gains in equities as the FTSE 100 index posted a gain of 2.7% on the day. The UK currency was unable to hold above the 1.2300 level against the dollar while the Euro traded marginally higher.
CFTC data recorded a further small decline in short Sterling positions to near 63,000 contracts in the latest week from over 65,000 the previous week, maintaining the scope for further position adjustment if there is a recovery in confidence towards the economy, although sentiment will remain very fragile in the short term.
Sterling edged higher to 1.2275 against the dollar on Monday as overall risk appetite held steady on the day with little change for the Euro.
The Swiss franc drew further support on Friday as Euro-Zone yields moved lower. The Euro dipped back below the 1.0100 level while the dollar also posted sharp losses to 0.9525 before a recovery to 0.9570. The Swiss currency retreated from intra-day highs as risk appetite improved and equities made strong gains on the day.
The latest data on sight deposits will be watched closely on Monday to assess the bank’s actions following the rate hike.
There was little change on Monday with the dollar around 0.9570 and the Euro traded just above 1.0100 as equity markets held a firm tone.