EUR / USD
ECB council member Kazaks stated that he would support a 25 basis-point rate hike in July and 50 basis points in September. He added that inflation would need to surprise on the downside for it not to be 50 basis points at the September meeting, although he added that investors should not think that this will be the new default.
Bank President Lagarde reiterated that the bank intends to increase rates by 25 basis points at the July meeting. She added that price rises are becoming more widespread across sectors and measures of underlying inflation have risen further. She also noted that the bank expects to raise rates again in September.
The Euro overall managed to edge higher on Monday as the dollar retreated slightly, although overall moves were limited, especially with US markets closed for a holiday. The Euro settled around 1.0525 at the European close with peripheral yields also in focus.
ECB chief economist Lane stated that he could see no situation where the July rate hike would not go ahead while the size of the September hike is still undecided.
On the US side, there was an element of caution ahead of Fed Chair Powell’s testimony to Congress due on Wednesday.
St Louis Fed President Bullard stated that the economy is slowing to the trend rate of growth as expected due to Fed actions. He added that the central bank must follow through and validate prior forward guidance as there would be the risk of inflation expectations becoming un-anchored if there was no action.
He did, however, consider that there may not be that far to go on quantitative tightening through bond sales and peak Fed expectations declined marginally.
The Euro found support just above 1.0500 against the dollar and settled little changed around 1.0520 in early Europe on Tuesday.
US Treasuries were little changed in electronic trading on Monday with the 10-year yield holding around 3.23%. Risk appetite held steady with US future posted limited net gains despite underlying reservations over the outlook. Underlying yen sentiment remained weak on overall yield grounds with the dollar settling just above the 135.00 level at the European close as US equity futures made limited headway during the day.
Japanese Finance Minister Suzuki stated that he is concerned about the recent sharp yen weakening and will respond appropriately when necessary. He added that the Ministry will liaise with the Bank of Japan while watching the situation with an even greater sense of urgency. There was, however, still no sign of actual intervention in the market. Prime Minster Kishida stated that exchange rates are not the only consideration for monetary policy.
Overall yen sentiment remained notably weak with the dollar trading just above the 135.0 level in early Europe with the Euro holding above 142.00.
Bank of England MPC member Mann stated that there signs that inflation in the UK is becoming more embedded and persistent and also had more momentum after government support measures for households. She called for more aggressive tightening, especially as that would reduce the risk that domestic inflation is further boosted by inflation imported via Sterling depreciation. She was, however, also concerned that there is an increasingly stark trade-off in terms of persistent inflation against deteriorating real income. From a medium-term view, there was the possibility of a rate reversal when domestic supports to demand fade.
The reaction was relatively muted given that Mann had demonstrated her hawkish stance by backing a 50 basis-point hike at the June meeting.
Sterling drew limited support from a steadier tone surrounding risk appetite, although there was still an important element of caution with this week’s rail strikes also a negative factor. Sterling settled just below 1.2250 against the dollar from highs near 1.2280 while the Euro consolidated close to the 0.8600 level.
There will be some reservations over selling Sterling ahead of Wednesday’s inflation data with the headline CPI rate expected to edge higher to a fresh 40-year high at 9.1%. Sterling edged higher to 1.2260 against the dollar on Tuesday with the Euro retreating to around 0.8580 as tight ranges prevailed.
The latest weekly data recorded a decline in total Swiss sight deposits to CHF751.8bn from CHF753.1bn previously. The data signalled that the National Bank had not been intervening to retrain the franc which makes sense given that the central bank was preparing to raise interest rates at the quarterly meeting.
The franc maintained a firm tone on Monday as the rate hike continued to trigger demand. The Euro edged lower on the day while the dollar retreated to 0.9670.
There was little change on Tuesday with the dollar held little changed as consolidation was the dominant market focus.