Powell & Bailey stays hawkish.

There are still dovish voices within the ECB as council member Centano stated that over-hiking is not an acceptable position. He added that the economy is already taking a hit while inflation is easing as quickly as it went up. The overall flow of rhetoric remained broadly hawkish.

Fed Chair Powell commented that he believes that there is a more restrictive policy coming. He added that data on jobs, activity and inflation have all been strong over the past quarter and policy has not been restrictive for very long. He also stated that labour costs are high in non-housing services and that the Fed needs to see more softening in the labour market. There was certainly no sign of Powell adopting a more dovish stance on the policy outlook.

Following the latest comments, there was a further shift in Fed Funds rate futures with the chances of a July hike seen at close to 85%.

In comments on Wednesday, Bank of England Governor Bailey stated that the data showed a clear persistence of inflation and that it will be a worse outcome if the bank doesn’t bring inflation down. He also pointed to a very robust labour market with a smaller workforce than was the case before the covid outbreak. UK 2-year yields still declined from 15-year highs.

The hawkish Fed rhetoric, expectations of a July rate hike and unease over the global economy continued to provide net dollar support. The dollar index posted a 10-day high during the day. The latest German inflation data will be released on Thursday. Consensus forecasts are for the annual rate to increase slightly to 6.3% from 6.1%.

US labour-market trends will be important and the latest US jobless claims data will be released on Thursday. Consensus forecasts are for a small increase in initial claims to 266,000 from 264,00 previously.

The Swedish Riksbank will announce its policy decision on Thursday with consensus forecasts for a latest US jobless claims data will be released on Thursday. Consensus forecasts are for a further increase of 25 basis points to 3.75%.

ECB rhetoric failed to provide any further Euro support on Thursday. Hawkish rhetoric from Fed Chair Powell supported the dollar. Quarter-end position adjustment also supported the US currency. EUR/USD posted losses to lows just below 1.0900 before a tentative recovery. Fed expectations maintained selling pressure on the yen. USD/JPY posted fresh 7-month highs above 144.50 before a correction.

The Swiss franc overall resisted further selling pressure. EUR/CHF settled below 0.9800 with limited USD/CHF gains to 0.8960. Sterling dipped sharply during the day despite hawkish BoE rhetoric. There was some buying on dips. The 2-year yield retreated from 15-year highs with position liquidation also a feature. GBP/USD dipped to lows near 1.2600 before recovering.

The Australian dollar remained under pressure after the inflation data with US dollar gains also undermining sentiment. AUD/USD dipped to lows just below 0.6600. AUD/USD nudged above 0.6600 on Thursday after firm retail sales data. USD/CAD hit highs just above 1.3270 and traded close to this level on Thursday after a correction to 1.3250.

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