EUR / USD
On Friday, the Euro drew an element of support from a narrowing of Italian-German yield spreads to below 200 basis points as immediate fragmentation fears eased slightly. ECB council member Knot also stated that several 50 basis-point rate hikes are possible if inflation worsens.
The Euro was, however, undermined by fresh concerns over developments in the energy sector as Russia again reduced gas supplies to Germany.
The dollar overall recovered strongly from losses seen on Thursday with markets considering the sharp losses were due to position adjustment rather than a change in overall stance. In this environment, there was strong interest in buying dollar dips given overall yield expectations.
In comments on Friday, Minneapolis Fed President Kashkari stated that he could back a further 75 basis-point increase in rates at the July meeting and it might then be prudent to continue with 50 basis-point hikes after the July meeting. He added that the Fed might need to raise rates beyond what is currently forecasted if inflation drifts higher or the supply side does not improve. The overall stance continues to be a notable shift from the dovish rhetoric that dominated his rhetoric previously.
The Euro retreated steadily to lows below 1.0450 before a recovery to near 1.0480 as the dollar retreated from peak levels as Wall Street rallied.
CFC data recorded a sharp reversal in Euro positioning with a net short position of 6,000 contracts from longs above 50,000 the previous week, which should limit the potential for further selling. In French parliamentary election results, President Macron’s centrist party lost its majority with gains for the left and right-wing alliances. The Euro, however, was able to make a limited recovery to 1.0530 on Monday as the dollar retreated with some speculation that US rate expectations are close to a peak.
JPY
US industrial production increased 0.2% for May compared with market expectations of a 0.4% increase, but the April increase was revised up to 1.4% from 1.1%.
After edging higher ahead of the New York open, US Treasures lost dipped again with the 10-year yield increasing to near 3.30%.
The yen overall remained firmly on the defensive following the Bank of Japan decision to continue with the cap on 10-year yields at 0.25%. The dollar strengthened to high around 135.20 after the US open and peaked close to 24-year highs at 135.40 as yield spreads continued to undermine the Japanese currency.
CFTC data recorded a notable decline in short yen positioning to just below 70,000 contracts in the latest week from above 91,000 previously.
Over the weekend, Fed Governor Waller stated that he will support a further 75 basis-point rate hike at the July policy meeting if the data comes in as he expects.
Longer-term US yields were slightly lower on Monday as inflation expectations also declined slightly while underlying yen sentiment remained weak.
The dollar peaked just below 24-year highs close to 135.50 before a retreat to just below 135.00 as the dollar posted a wider retreat with the Euro just above 142.00.
GBP
In comments on Friday, Bank of England chief economist Pill stated that the bank was looking at the persistence of inflationary pressures and price pressures becoming embedded in the economy would be a trigger for more aggressive action. In this context, he noted that the message that it may have to act forcefully is not unconditional
He also noted that increasing rates too aggressively would not stop short-term inflation pressures, but would add to the risks of an undesirable slowdown in the economy. He also commented that it was up to markets to decide whether the bank was signalling a 50 basis-point rate hike for August.
The rhetoric failed to provide Sterling support given the conditionality attached to forceful action. Risk conditions were also fragile, maintaining a lack of support for the UK currency and there was a fresh retreat to below 1.2200 against the dollar before a slight recovery to 1.2225 while the Euro posted net gains to 0.8585.
CFTC data recorded a further small decline in short non-commercial Sterling positions to near 65,600 from near 71,000 the previous week.
Sterling edged higher against the dollar on Monday to 1.2240, but Sterling overall was unable to make headway with the Euro strengthening to the 0.8600 level.
CHF
The Swiss franc maintained a strong tone on Friday with further buying following the surprise decision to raise interest rates the previous day which continued to lead to a scaling back of short franc positions. Risk appetite was also fragile, but the increase in global yields limited support for the Swiss currency.
The Euro dipped to lows at 1.0100 before a recovery to 1.0180 while the dollar posted a net gain to 0.9715. Trends in bond yields and risk appetite will continue to have an important impact during the day with the dollar retreating to around 0.9660.
Technical Levels
