EUR / USD
Euro-Zone industrial production increased 0.8% for May with a year-on-year increase of 1.6% after a 2.5% decline previously. The Euro was able to make limited headway to highs around 1.0080 ahead of the New York open with the dollar edging lower amid hopes that US inflation pressures are peaking.
US consumer prices increased 1.3% for June with the headline inflation rate strengthening to a fresh 40-year high of 9.1% from 8.6% previously and above consensus forecasts of 8.8%. Energy prices increased 42.6% over the year with a 10.4% increase for food prices. The underlying rate declined slightly to 5.9% from 6.0%, but was above consensus forecasts of 5.7%. On a monthly basis, there were significant increases in the cost of new vehicles and transportation services.
The stronger than expected data triggered fresh concerns over underlying inflation pressures in the economy and also increased expectations that the Federal Reserve would have to take more aggressive action to curb inflation pressures. Futures markets fully priced in a 75 basis-point rate hike for July with expectations of a rate above 3.50% at the end of 2022. There was also some speculation that the Fed would hike by 100 basis points, especially after the Bank of Canada move and the dollar posted sharp gains. The Euro again found support at parity while the dollar lost ground as long positions were scaled back amid unease over the US economic outlook.
Overall, the Euro rallied to 1.0120 before a fresh retreat to 1.0070. Expectations of an aggressive Fed stance continuing to provide underlying dollar support and the Euro retreated to 1.0020 in early Europe on Thursday. Markets will be looking to challenge parity again with ECB rhetoric also in focus.
There were sharp losses in Treasuries after the US inflation data with the 10-year yield increasing to near 3.05% and the dollar posted sharp gains with fresh 23-year highs at 137.85. There was, however, a sharp reversal later in the session as recession fears increased again and the 10-year yield dipped to near 2.90% with the yield curve becoming inverted to the largest extent since August 2020. In this environment, the dollar retreated to the 137.15 area.
The latest Fed Beige Book reported that there had been a net improvement in labour availability and weaker demand for workers which will encourage the Fed that the risks of a wage-price spiral had diminished slightly which could dampen wider inflation fears, although there was still growth in wages.
Cleveland Fed President Mester stated that the CPI report was uniformly negative and the data does not suggest that the July rate hike should be smaller than for June, but there is no need for a decision yet. San Francisco head Daly stated that the most likely response is another 75 basis-point hike, but 100 basis points is possible.
Chinese coronavirus developments were slightly more positive, but risk appetite remained cautious. Although the 10-year yield held below 3.00%, the potential for even higher short-term rates triggered further dollar buying against the yen with the US currency surging to a fresh 23-year high around 138.45. Despite government comments that it is concerned by rapid yen falls, there was no evidence of intervention at this stage and yen sentiment remained very weak.
Sterling edged higher after the stronger than expected GDP data for May, but the impact was short lived, especially with weak retail sales in the data and a lack of confidence in the outlook amid severe cost pressures. There were also further fears over the impact of escalating energy prices, especially with prices expected to increase even more sharply in October. These rate hikes would put further pressure on consumer spending, but fiscal support payments will start this month.
Sterling dipped lower after the stronger than expected US inflation data, especially with a renewed slide in global equities. There was a retreat to lows around 1.1830 against the dollar before a recovery to above 1.1900 as the US currency retreated.
The Euro dipped to 8-week lows just above 0.8400 before a recovery to near 0.8450. The potential for more aggressive central bank rate hikes undermined potential Sterling support with the UK currency retreating to around 1.1850 against the strong dollar on Thursday as global events dominated market moves.
The Swiss franc maintained a strong tone during Wednesday with an on-going lack of selling interest. There was further speculation that the National Bank would look to strengthen the currency in order to curb inflation. Unease over the global outlook also provided underlying franc support.
The Euro dipped to fresh 7-year lows at 0.9800 before a recovery to 0.9850 while the dollar posted net losses to 0.9785. The franc was resilient despite the potential for global rate hikes with the Euro unable to make headway and the dollar trading around 0.9830 amid the firm underlying dollar tone.