EUR / USD
The Euro staged a strong rally in early Europe on Thursday as intervention to boost the yen against the dollar triggered wider losses in the US currency. The Euro briefly moved above the 0.9900 level but failed to hold the gains as over confidence in the Euro area remained weak.
There were further concerns surrounding the Ukraine situation and energy-supply issues with markets also waiting for the weekend Italian election with expected gains for right-wing parties. Euro-Zone consumer confidence dipped to -28.8 for September from -25.0 the previous month and below consensus forecasts of -25.8.
US initial jobless claims edged higher to 213,000 in the latest week from 208,000 the previous week, but slightly below market expectations of 218,000 while continuing claims declined to 1.38mn from 1.40mn. The data suggested a solid labour market which provided net support for the US currency.
Overall confidence in the Euro-Zone outlook remained weak and overall Federal Reserve monetary policy continued to support the dollar. In this environment, the Euro retreated steadily with lows around 0.9825 before consolidation. Narrow ranges prevailed on Friday with the Euro trading around 0.9840. The latest Euro-Zone business confidence data will be watched closely during the day with Euro-Zone and the US services data important for overall sentiment.
Just after Thursday’s European open, Japan had announced that there had been intervention in the market through the Bank of Japan to support the yen. The bank was concerned over the rate of yen losses and one-sided market. This was the first open-market intervention since 2008. The yen surged following the announcement with the dollar slumping from 24-year highs just below 146.00 to trade to lows below 140.50 as overall volatility spiked to the highest level since 2016.
There were still expectations that the underlying fundamentals and yield spreads would undermine the Japanese currency and the yen was unable to sustain gains.
US Treasuries were little changed ahead of the New York open, but were then subjected to heavy selling pressure with the 10-year yield surging to highs around 3.70% and the highest level for over 12 years amid expectations of sustained tightening.
The surge in yields provided further support for the dollar with a move back above the 142.00 level and it traded near 142.50 towards the New York close.
There was no further reported intervention by the Bank of Japan on Friday with a market holiday in Japan and volatility eased with the dollar trading around 142.20.
Sterling posted net gains ahead of the Bank of England policy decision as yen intervention triggered wider dollar losses. The Bank of England increased interest rates by 50 basis points to 2.25% at the latest policy meeting which was in line with expectations, although there had been considerable speculation that the bank could opt for a 75 basis-point hike. Three members of the committee did vote for the larger hike while new member Dhingra backed a 25 basis-point hike due to fears over the outlook.
The bank lowered its peak inflation forecast to 11% due to the energy guarantee scheme, but also noted that there would be a significant impact on demand and pointed to major uncertainty over the outlook, especially with the government set to announce a major fiscal stimulus on Friday. In this context, the bank will assess the situation fully at the November meeting. Sterling dipped lower in an immediate response to the decision with markets scaling back end-2022 rate forecasts, but the currency was resilient to some extent with expectations that the bank would have to tighten more substantially over the next few months.
Chancellor Kwarteng confirmed that the National Insurance hike would be reversed from November with expectations of a very substantial fiscal stimulus.
Sterling rallied after initial selling, but failed to hold above 1.1300 against the dollar and retreated back to around 1.1250. The Euro also recovered from below 0.8700 to trade around 0.8735. The GfK consumer confidence index slumped further to a record low of -49 for September from -44 previously and Sterling remained on the defensive in early Europe and below 1.1250 with fears that a surge in government borrowing would further undermine overseas confidence in the currency.
The Swiss National Bank increased interest rates by 75 basis points at the latest policy meeting, in line with market expectations. This moved benchmark rates out of negative territory for the first time since 2014. The central bank stated that it would intervene in currency markets if necessary and could buy or sell the franc while it stated that further hikes might be needed. The statement was less hawkish than expected and the franc dipped sharply after the decision.
The Euro surged to highs above 0.9700 before a correction to near 0.9600 while the dollar surged to 0.9850 highs before a retreat to 0.9780 on Friday.