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EUR / USD

 

The Euro was unable to make further headway in early Europe on Wednesday with the underlying element of uncertainty surrounding the Euro-Zone economic outlook limiting the scope for further buying while pressure for short covering eased slightly ahead of the ECB policy meeting.

There was a warning from Russian President Putin that gas supplies through the Nord-Stream pipeline could be switched off, maintaining an important element of uncertainty over the outlook for supplies. There were also further warnings from Euro-Zone officials over the heavy economic damage if supplies are cut off.

The EU Commission continued to make contingency plans to cope with gas supplies being cut off during the winter period.

Risk appetite also dipped ahead of the New York open following comments from Russian Foreign Minister Lavrov. He stated that geographical objectives of the special operation in Ukraine have changed from just the Donbas to include a number of other territories. The Euro dipped to lows around 1.0175 before regaining some ground.

Euro-Zone consumer confidence dipped again to -27 for July from -23.8 previously and weaker than consensus forecasts of -24.9.

There was a slightly more confident risk tone towards the European close, but the Euro struggled to regain support and traded close to 1.0200

Markets will be braced for substantial Euro moves during Thursday with the ECB policy decision and press conference. Italian Prime Minister Draghi will also meet with the President and is expected to resign while there will also be uncertainty over the resumption of Nord-stream gas supplies which is scheduled on Thursday.

Caution prevailed in early Europe with the Euro edging high to around 1.0225 as the dollar overall drifted lower.

 

JPY

 

US existing home sales declined to an annual rate of 5.12mn for June from 5.41mn previously which was below consensus forecasts of 5.38mn and the lowest reading since July 2020. The data maintained reservations over the US housing sector, but Treasuries were unable to gain support following the release and the 10-year yield moved back above the 3.00% level with the 2-year yield close to 3.20% which provide some support for the US currency.

The dollar was held in tight ranges and traded around 138.15 at the New York close as the Fed remained in a silent period ahead of next week’s policy decision.

The Bank of Japan made no changes to monetary policy with interest rates at -0.1% and a 0% target for the 10-year yield. The decision was in line with consensus forecasts and there had been little expectation of a policy change this time round which dampened any market reaction.  There was some speculation that the bank would adjust policy over the next few months which limited scope for fresh yen selling, but fundamentals remained weak as Japan continued to run a trade deficit amid very high energy prices. There were still reservations over Chinese coronavirus trends with the authorities looking to maintain tight control ahead of the Communist Party Congress. The dollar edged higher to around 138.25 with little net change in equities and the Euro around 141.40.

 

GBP

 

Sterling was unable to gain support from the UK inflation data as the underlying rate edged lower on the month while markets had already moved to price in a more hawkish stance from the Bank of England. There are strong expectations that the bank will sanction a 50 basis-point rate hike at the August meeting, limiting scope for further buying. Sterling was unable to derive further support from a more solid tone surrounding risk appetite, especially with global economic reservations.

Markets monitored political developments with some reservations over uncertainty surrounding tax policies. Foreign Secretary Truss’s criticism of the Bank of England inflation performance also triggered an element of uncertainty as she won through to the final ballot of Conservative Party members and will run-off against former Chancellor Sunak. Overall, Sterling retreated to around 1.1970 at the European close with the Euro edging lower to near 0.8510. Sterling was just below 1.2000 in early Europe on Thursday as markets monitored fiscal policy with the Euro strengthening to around 0.8520 with choppy trading inevitable later in the day.

 

CHF

 

The Swiss franc was unable to make headway on Wednesday as overall risk appetite held steady. The Euro edged higher to 0.9920 while the dollar posted a net advance to 0.9730. The dollar traded just below 0.9700 on Thursday with little net change in risk conditions.

The ECB policy decision will be important on Thursday with important decisions on interest rates and the new tool to contain peripheral bond yields. In this context, there is likely to be choppy trading in the day with net franc support if the ECB fails to boost confidence that peripheral bond yields can be contained.

 

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