EUR / USD
German consumer confidence declined further to -30.6 for August from -27.7 previously which was below consensus forecasts and the weakest reading on record. Italian business and consumer confidence also declined sharply for July as high energy prices continued to have a negative impact.
Flows through the Nord-Stream pipeline declined as expected on Wednesday, reinforcing concerns surrounding supplies during the winter. The S&P move to downgrade the Italian rating outlook to stable from positive also undermined confidence with the Euro drifting lower to near 1.0110 ahead of the Federal Reserve decision.
The US central bank increased interest rates by a further 75 basis points to 2.50% which was in line with consensus forecasts and the policy decision was unanimous.
According to the Fed, recent indicators of spending and production have softened, but job gains have been robust and inflation remains elevated.
The Fed stated that it is attentive to inflation risks and expects further rate hikes will be appropriate. It will, however, be prepared to adjust strategy if risks emerge that could jeopardise its goals and expectations surrounding another 75 basis-point hike at the September meeting faded.
Fed Chair Powell stated that job growth is slower, but still robust. The main focus was on inflation and, although commodity prices have fallen, he stated that there is still additional upward pressure on inflation and the Fed wants to see compelling evidence of it coming down over the next few months. Powell also commented that another unusually large increase in rates could be appropriate and would depend on the data. He did, however, add that it is likely to be appropriate to slow the rate of increases at some point and the Fed is aiming for a range of 3.00-3.50% at the end of 2022. According to Powell, there is also some evidence of a necessary slowdown in activity.
There was choppy trading following Powell’s rhetoric with the dollar eventually declining sharply amid relief that rhetoric was not even more hawkish with hopes that there will be a slightly lower peak in rates if the data is subdued. The Euro moved above 1.0200 and held above this level in early Europe on Thursday to trade around 1.0220 with the dollar near 3-week lows. The latest US GDP data on Thursday will also be important for expectations surrounding the economy and Fed policy.
JPY
US durable goods orders increased 1.9% for June after a 0.8% increase the previous month and compared with expectations of a small decline for the month while underlying orders increased 0.3%. The June goods trade balance declined to $98.2bn from $104.0bn the previous month as exports posted another strong advance.
US 10-year bond yields held around 2.80% after the New York open and the dollar consolidated close to 137.00 against the yen as narrow ranges prevailed.
Treasuries rallied slightly in immediate response to the Fed policy statement. Fed Chair Powell stated that it was time to go on a meeting by meeting basis and not provide as clear a guide as before which will tend to increase underlying volatility. US yields also retreated amid unease over the growth outlook with the dollar initially retreating to below 136.50. The dollar was unable to regain ground amid expectations of a slightly less hawkish Fed policy.
Hawkish rhetoric from North Korea’s Kim also provided an element of yen support and the dollar dipped sharply to 3-week lows below 135.50 with lows at 135.10.
GBP
Sterling was held in tight ranges ahead of Wednesday’s Federal Reserve policy decision as it held above the 1.2000 level against the dollar while the Euro was unable to stage a recovery. Overall risk appetite held firm which helped underpin the UK currency and there was a reluctance to sell the currency ahead of next week’s Bank of England policy decision. Yield spreads, however, failed to provide net support for the UK currency and there were further fears over the UK outlook.
There was choppy trading following the Fed policy statement and Powell’s press conference. Overall, the dollar lost ground which underpinned the UK currency and strong gains on Wall Street boosted risk appetite which also underpinned the UK currency. Sterling spiked to highs above 1.2170 while the Euro drifted lower to 12-week lows near 0.8380. There was little net change on Thursday with markets continuing to monitor global risk conditions closely and Sterling traded around 1.2175.
CHF
The Swiss investor sentiment index improved to -57.2 for July from -72.7 previously which provided an element of relief. The franc edged lower on Wednesday as a firm tone surrounding risk appetite curbed potential defensive support for the Swiss currency.
The Euro posted net gains to near 0.9790 while the dollar dipped below 0.9600 amid wider losses. The Euro was unable to gain further support on Thursday as fears surrounding the Euro-Zone outlook continued to sap underlying support while the dollar consolidated just below the 0.9600 level.
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