EUR / USD
The German ZEW economic sentiment index dipped slightly further to -55.3 for August from -53.8 previously. This was slightly weaker than consensus forecasts and the lowest reading since 2008 while the current conditions index also edged lower to -47.6 from -45.8 in July. Although the main focus was on Germany, the Euro-Zone index also lost ground for the month. The data maintained fears over the German outlook, especially with an on-going focus on the surge in gas prices.
The Euro remained on the defensive during the European session on Tuesday and posted August lows close to 1.0120, but it was able to stage a limited recovery into the New York open with traders reluctant to push the dollar higher given doubts over US trends and hopes for peak US inflation.
US housing starts dipped to an annual rate of 1.45mn for July from a revised 1.60mn the previous month which was below consensus forecasts of 1.54mn and the lowest reading since September 2020. Building permits edged lower to 1.67mn from 1.70mn, but beat market expectations. The data maintained reservations over the housing-sector outlook, although the permits data suggested underlying resilience.
The Euro was able to resist further selling pressure later in the day as equities moved higher and there were also reports that the German government would keep three nuclear power plants operation, although this was quickly denied by the government.
The Euro strengthened to highs just below 1.0200 before drifting lower again. The dollar edged lower on Wednesday with the Euro around 1.0185 ahead of the latest Federal Reserve minutes due later on Wednesday. Fears over gas prices continued to limit underlying Euro support.
The dollar continued to post gains ahead of the New York open with a move above the 134.00 level as the yen was unable to gain any traction in global markets.
US industrial production increased 0.6% for July after a 0.2% decline the previous month and above consensus forecasts of a 0.3% increase. Treasuries edged lower into Tuesday’s New York open with the 10-year yield increasing to around 2.82%. Although the moves were relatively contained, the dollar secured a further advance to highs above 134.50 against the yen before a slight correction as overall risk conditions held steady.
There were no comments from Fed speaker with markets waiting for the Fed minutes on Wednesday which are liable to be broadly hawkish.
Japan’s Tankan manufacturing index strengthened to a 7-month high for August while the non-manufacturing index strengthened to the highest level for close to 3 years.
Japan’s export data was stronger than expected with record shipments to China and the US, although the trade deficit continued to widen due to the surge in energy imports. Relatively narrow ranges prevailed in Asia with the dollar trading just above the 134.00 level as regional equity markets posted measured net gains.
There was a measured reaction to the latest UK jobs data with evidence of limited cooling in the labour market offset by a stronger pace of wages growth. There was further speculation that wages growth was too strong to be compatible with the Bank of England inflation target and that the central bank would decide to sanction a further 50 basis-point rate hike at the September policy meeting in order to contain inflation pressures.
Sterling briefly dipped to near 1.2000 against the dollar, but there was solid support on approach and the currency secured some relief later in the day, especially with the dollar paring initial gains. There was also some evidence of short covering ahead of Wednesday’s inflation data.
Sterling advanced to highs above 1.2100 against the dollar before fading while the Euro retreated to 0.8415. UK consumer prices increased 0.6% for July with the year-on-year inflation rate jumping to 10.1% from 9.4%. This was above consensus forecasts of 9.8% and the highest rate for over 40 years. Core inflation also increased to 6.2% from 5.8%. Sterling failed to hold initial gains to 1.2140 against the dollar and traded just above 1.2100 with the Euro retreating to near 0.8400.
The Swiss franc was unable to hold recent gains on Tuesday with some speculation that the National Bank would intervene to curb potential gains or at least attempt to smooth underlying appreciation pressure. Overall risk appetite proved resilient which helped limit franc support. The Euro also managed to secure some relief with a recovery to the 0.9680 area while the dollar posted net gains to above the 0.9500 level, but there were still concerns over the Euro-Zone outlook.
There was limited net change on Wednesday with the dollar trading just above 0.9500 as overall risk appetite held steady.