EUR / USD
German industrial production declined 0.3% for July after a revised 0.8% increase the previous month, but slightly stronger than expected. The Euro was unable to make any headway in early Europe on Wednesday with a fresh test of support below 0.9900, although it held just above the 19-year lows near 0.9860 posted on Tuesday.
The US trade deficit narrowed to $70.7bn for July from $80.9bn the previous month and close to consensus forecasts with a notable decline in imports for the month.
The Euro rallied after the US open as the dollar retreated from its best levels while there was an element of short covering ahead of the ECB as it rallied towards parity.
The Federal Reserve Beige Book of economic conditions stated that price growth had slowed in 9 of the 12 districts while companies had managed to improve worker retention and there was generally subdued growth within the economy. Overall, there was slightly increased optimism that inflation pressures were peaking.
The ECB will announce its latest policy decision on Thursday with markets split between a 50 and 75 basis-point rate hike, but leading slightly towards the latter. Comments from bank President Lagarde and overall forward guidance will be watched closely with choppy Euro trading after the decision.
The latest comments from Fed Chair Powell will also be important on Thursday and the Euro settled close to parity in early Europe with selling above this level.
The dollar continued to post strong gains into Wednesday’s New York open with a fresh 24-year high fractionally below the 145.00 level. The dollar pushed sharply higher after a Wall Street Journal report suggested that there could be a 75 basis-point rate hike this month.
Cleveland Fed President Mester reiterated that she was not convinced inflation has peaked yet with wages growth too high, although she added that she will decide on the preferred rate increase this month at the Fed meeting. The New York Fed stated that global supply-chain pressures eased in August.
Fed Governor Brainard stated that monetary policy will need to be restrictive for some time and that the policy rate will ned to be raised further, but there was no indication on the likely size of the rate hike this month. She reiterated that it was critical to guard against an increase in inflation expectations. She did, however, note that global tightening may help to reduce US inflation pressures which offered a slightly more dovish element.
Treasuries rallied slightly after the New York open and the dollar corrected lower with a move back below 144.00. Markets remained on alert over the threat of Bank of Japan intervention to curb yen losses, but the yen failed to secure underlying demand and the dollar consolidated close to 144.00 with the Euro around 143.80.
Bank of England Governor Bailey stated that there are dollar specific factors behind Sterling weakness with the Fed much more focussed on bringing the demand shock under control, although he did admit that there is a UK story behind Sterling weakness as well. Bailey added that the government’s plan to cap surging energy costs could slow inflation, but it was too soon to say what that will mean for interest rates. He also expressed concerns over the potential risk of an increase in inflation expectations given the surge in the headline rate. According to Bailey, it is Putin who is going to put the economy into recession not the MPC.
MPC member Tenreyro stated that the bank should proceed slowly when there is a lot of uncertainty and a gradual increase in rates reduces the risk of over-shooting. She added that without a rate hike in August rates were sufficient to return inflation to target. Chief economist Pill expressed that there was a high degree of uncertainty which makes it difficult to have a strong view. The government’s energy-support package will provide an element of clarity.
Sterling came under sustained pressure during European trading on Wednesday with confidence in the outlook continuing to deteriorate, especially with concerns over an impending surge in government borrowing to fund the energy cap. Sterling briefly dipped to 37-year lows just above 1.1400 against the dollar before recovering ground to the 1.1500 area as the dollar retreated. The Euro posted net gains to 0.8680 amid an underlying lack of confidence in the UK outlook.
The Swiss franc overall was able to resist significant selling pressure during Wednesday with markets continuing to monitor the global trends. The Euro edged higher ahead of the latest ECB policy decision and traded around 0.9760. The dollar was again unable to hold above 0.9850 and retreated to near 0.9800.
Risk appetite was firmer in US trading which limited franc support to some extent while there was an element of caution ahead of the ECB policy meeting. A hawkish stance from the ECB would underpin the Euro, but markets expect a further National Bank rate increase this month with choppy trading likely.