EUR / USD
ECB council member Rehn stated that the central bank is likely to raise interest rates 25 basis points in July with a further 50 basis-point hike in September.
Headline US retail sales increased 1.0% for June and above consensus forecasts of 0.8% and followed a revised 0.1% decline the previous month. Underlying sales also increased 1.0% on the month after a revised 0.6% gain previously while the control group registered a 0.8% increase on the month.
The dollar advanced slightly after the retail sales data, although the impact was limited as markets considered that the data was not notably stronger than expected.
The University of Michigan consumer confidence index edged higher to 51.1 for July from the 40-year low of 50.0 previously and slightly above expectations. There was a slightly stronger bounce in current conditions, but the expectations index edged lower with the weakest reading since 1980.
The 1-year inflation expectations index edged lower to 5.2% from 5.3% while the 5-year index dipped to a 9-month low of 2.8% from 3.1%.
Given the Fed focus on inflation expectations, fears over a 100 basis-point hike this month faded after the data and risk appetite strengthened. The dollar lost defensive support as Wall Street indices posted net gains and the Euro posted a net advance to 1.0085 at the New York close.
CFTC data recorded a net increase in short Euro positions to 25,000 contracts from 17,000 previously which illustrates that there is still scope for further Euro selling.
The Fed blackout period is now in force and markets will continue to monitor the media closely given that a Wall Street Journal report just ahead of the previous meeting which warned that the Fed was considering a 75 basis-point rate hike. Following Friday’s data, markets were more confident that the Fed would opt against a 100 basis-point rate hike which limited the scope for further dollar buying with the Euro settling just below 1.0100 on Monday but Euro-Zone confidence remained weak.
The New York Fed Empire manufacturing survey strengthened to 11.1 for June from -1.2 previously and well above market expectations of -2.0. There was a slightly stronger reading for new orders and a stronger increase in production, but unfilled orders contracted again.
Employment increased at a slightly faster rate while there was a significant dip in inflation pressures with a slower rate of increase in costs and prices received
Atlanta Fed President Bostic stated that moving too dramatically on interest rates could undermine the economy and add to uncertainty. Treasuries rallied after the US data releases with the 2-year yield retreating to just below 3.1% from near 3.15% which sapped dollar support as it retreated to below 138.50 against the yen.
St Louis head Bullard stated that he expects to see the Fed Funds rate at 3.75% at the end of 2022 from 3.50% previously, but overall Fed expectations were scaled back slightly. In this environment, the dollar overall lost ground and retreated to the 118.50 area late in the US session.
China reported an increase in coronavirus cases which maintained some reservations over the outlook. Japanese markets were closed for a holiday on Monday and the dollar dipped to lows just above 138.00 before trading around 138.30 as risk appetite held steady with the Euro just above 139.50.
There were no major domestic developments during Friday with the UK currency influenced primarily by global developments. Sterling did find support above 1.1800 and secured net gains after the New York open as risk appetite strengthened and the US currency edged lower. Sterling, however, tended to under-perform other majors amid a lack of confidence in the fundamentals. It settled around 1.1850 against the dollar while the Euro posted a net gain to 0.8510.
CFTC data recorded a small increase in net Sterling shorts to just over 59,000 contracts from around 56,000 the previous week.
Markets continued to monitor the Conservative Party leadership contest with limited Sterling support from expectations of tax cuts, although the overall market impact was limited with global trends having a more substantial impact. Sterling was able to advance to around 1.1885 in early Europe on Monday as the Euro edged lower.
The Euro edged higher against the franc on Friday and traded around 0.9860, but the franc overall maintained a firm tone despite a stronger reading surrounding risk appetite and the dollar dipped below 0.9800 after the raft of US data releases.
Media reports in Switzerland suggested that the National Bank would increase interest rates by at least 50 basis points at the September meeting which provided further net franc support and the dollar traded around 0.9760 as markets waited for the latest data on Swiss sight deposits.