EUR / USD
The Euro edged higher in early Europe on Tuesday with the dollar unable to gain sustained support as global equities posted net gains.
The US NFIB small-business confidence index edged higher to 89.9 for July from 89.5 the previous month and slightly above consensus forecasts. Business owners were still concerned over inflation pressures with 37% of owners reporting that inflation was the most important problem, the highest proportion since the end of 1979.
The IBD consumer confidence index dipped to 38.1 for August from 38.5 previously which was below consensus forecasts of 40.0 and the weakest reading since 2011. The consumer confidence data will maintain some reservations over the outlook for spending, although overall correlations remain limited.
The Euro posted highs just below 1.0250, but drifted lower towards the European close as equities moved lower with Euro support also sapped by a decline in the DAX index amid underlying fears over the German outlook. In particular, there were on-going fears surrounding gas supplies.
The latest US consumer prices data will be released on Wednesday and will have an important impact on interest rate expectations and currency markets.
Consensus forecasts are for the headline rate to decline to 8.7% from the 40-year high of 9.1% last month, but the core rate is forecast to increase to 6.1% from 5.9%.
Higher than expected data would increase pressure on the Federal Reserve to sanction a more aggressive rate hike at the September meeting and boost the dollar, especially with risk appetite liable to slide. Narrow ranges prevailed on Wednesday with the Euro holding just above 1.0200 as the dollar overall held steady.
Provisional data for the second quarter registered a decline in US productivity at an annual rate of 4.6% after a 7.4% decline previously with a 10.8% increase in unit labour cost from 12.7% previously. Although the data is liable to be revised considerably there will still be important concerns surrounding underlying cost pressures in the economy. The combination of strong upward pressure on labour costs and weak productivity will reinforce stagflation fears and potentially make it more difficult for the Fed to curb inflation. From a longer-term view, concerns over dollar over-valuation will tend to increase.
St Louis Fed President Bullard stated that it is too early to claim that inflation has peaked even if there is limited relief in the headline figure.
Treasuries lost ground ahead of the New York open and there was only very limited relief after the US data with the 10-year yield around 2.80%. Narrow ranges prevailed with the dollar settling around 135.00 against the yen as a decline in equities limited potential selling pressure on the Japanese yen.
Chinese CPI inflation increased to 2.7% for July from 2.5% previously, but below expectations of 2.9% while producer prices inflation moderated to 4.2% from 6.1%.
Market conditions remained subdued in Asia with the dollar continuing to trade around the 135.00 level and the Euro just below 138.00.
Sterling was held in generally narrow ranges during Tuesday with a lack of major developments during the day. Overall confidence in the UK outlook remained notably weak, but there were also some speculation that much of the bad news had been priced in. Bank of England Deputy Governor Ramsden stated that further increases in interest rates were likely, although he also stated that it was possible that an economic downturn would lead to rate cuts next year.
Sterling advanced to highs around 1.2130 against the dollar, but there was an underlying lack of traction while the Euro posted a measured net advance.
There was further pressure for additional government support to ease the pressure from higher energy prices with fears over even steeper price increases in October and January. Towards the European close, there were reports that the UK was preparing for the possibility of power cuts to homes and industries during January with fears that very dry conditions in Norway would trigger a sustained decline in electricity exports to the UK.
Sterling dipped back below the 1.2100 level towards the European close and traded around 1.2080 on Wednesday with the Euro at 2-week highs around 0.8460.
The Swiss franc was held in tight ranges during Tuesday with low trading volumes contributing to a lack of activity. Overall risk appetite was slightly more cautious during the day which limited scope for net franc selling with markets also monitoring global yield trends closely. The Euro settled just below the 0.9750 level with fears over the outlook continuing to sap support while the dollar posted limited net losses.
The dollar traded around 0.9540 in early Europe and the franc is likely to gain net support against the Euro if there is stronger than expected US inflation data.