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EUR / USD

 

The dollar was unable to sustain a tentative recovery in early Europe on Thursday with sentiment still undermined by Wednesday’s inflation data. The Euro moved back above the 1.0300 level and edged higher into the New York open, although there were further concerns over gas prices which remained close to record highs.

US producer prices declined 0.5% for July compared with expectations of an increase of 0.2% with the yea-on-year increase slowing to 9.8% from 11.3% previously. Underlying prices increased 0.2% on the month with the annual rate slowing to 7.6% from 8.4%. The data reaction was much more muted than for Wednesday’s CPI report, but the weaker than expected data did feed through into the market narrative that inflation pressures were in the process of peaking.

Initial jobless claims increased to 262,000 in the latest week while the previous week’s figure was revised down to 248,000 from 260,000. This was close to market expectations and the highest reading since January while continuing clams edged higher to 1.43mn from 1.42mn.

The latest US data also recorded a further decline in gasoline prices to the lowest level for over four months which reinforced expectations that inflation pressures would ease further. In this context, there were further hopes that the Federal Reserve would be able to adopt a less aggressive stance in raising interest rates which undermined the dollar and also underpinned risk appetite which curbed potential demand for the US currency.

The Euro again tested resistance above the 1.0350 level against the dollar, but retreated into the European close as US yields moved higher again.

The dollar resisted further selling pressure and the Euro settled around 1.0320 on Friday with markets wary over choppy trading conditions later in the day.

 

JPY

 

The dollar was subjected to renewed selling ahead of Thursday’s New York open  with lows around 131.75 against the yen. Although the US producer prices data was slightly weaker than expected, Treasuries lost ground with the 10-year yield increasing to around 2.83% while stronger equities also curbed potential demand for the Japanese yen and the dollar recovered to above 132.50 and a peak near 133.00.

There were no major comments from Fed officials in Europe, but San Francisco President Daly stated after the US close that a 50 basis-point rate increase is the base case for September, although she is open to 75 basis points. She added that a Fed Funds rate of 3.4% is realistic for the end of 2022. She does not expect a hump in rates with rates raised and then on hold for a while with Daly also watching a series of inflation releases.

The latest University of Michigan consumer confidence data will be released on Friday with the inflation expectations components again watched closely given the importance for Federal Reserve expectations. US 10-year yields peaked just below 2.90% before declining slightly in Asia with the dollar trading around 133.20.

 

GBP

 

There were no major  domestic developments during Thursday with markets continuing to fret over the UK outlook, especially given on-going fears over the forthcoming jump in retail energy prices which is due to come into effect at the beginning of October. UK gas prices increased to August highs on Thursday which reinforced concerns over the outlook. There was further strong pressure to provide additional support to households, but there was important political inertia given that a new Prime Minister will not be appointed until early September. There was also no headway in talks between energy companies and the government.

Significantly, the UK currency was unable to draw support from firm global risk conditions which suggested an important lack of underlying confidence.

Sterling held firm against the dollar, but was unable to break above the 1.2250 level and the Euro posted net gains to 0.8460.

UK GDP declined 0.6% for June, but this was notably better than consensus forecasts of a 1.2% slide for the month and the quarterly contraction was held to 0.1% compared with expectations of a 0.2% retreat. Reaction to the data was limited with Sterling trading just below 1.2200 against the dollar.

 

CHF

 

The Swiss franc was again resilient on Thursday despite the firm tone surrounding risk appetite and net gains in global bond yields. The Euro dipped to test support below 0.9700 against the franc and posted fresh 7-year lows before a marginal recovery. The dollar was unable to make headway and dipped to lows around 0.9370 before recovering some ground and it traded around 0.9715 on Friday.

Swiss inflation remains lower than in G10 countries, maintaining expectations that the franc will appreciate in nominal terms over the longer-term.

 

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