Markets remained on high alert over central bank comments on inflation and monetary policy.

Risk appetite held steady on Thursday with solid US data boosting confidence in the outlook. Markets remained on high alert over central bank comments on inflation and monetary policy. US bond yields edged higher on the day and Wall Street indices posted net gains. Sentiment was more cautious late in the Asian session on Friday with position adjustment in focus.

The dollar attempted to recover on higher bond yields, with measured net gains. The yen weakened sharply amid negative sentiment and a flow into higher-yield assets. Sterling was boosted by rhetoric from BoE’s Vlieghe with EUR/GBP above 1.1650. Commodity currencies retreated on Friday as the US dollar posted gains.

EUR/USD fluctuated around 1.2200 against the dollar ahead of Thursday’s New York open with the Euro unable to generate further buying, especially given speculation that the ECB would look to cap currency gains. ECB council member de Cos stated that the rise in Euro-zone inflation is transitory.

US durable goods orders declined 1.3% for April compared with expectations of a 0.7% increase, but underlying orders increased 1.0% for the month after a 3.2% increase the previous month. First-quarter GDP was unrevised at 6.4% with a 4.3% increase in the GDP prices index.

Initial jobless claims declined to a 13-month low of 406,000 in the latest week from a revised 444,000 the previous week and below consensus forecasts of 425,000. Continuing claims also declined to 3.64mn from 3.74mn on the week while there was a small decline in pandemic claims for the week.

Pending home sales declined 4.4% in April following a 1.7% increase the previous month with further supply-side issues. The dollar continued to gain some respite, but the Euro was resilient amid recovery expectations and EUR/USD settled close to 1.2200 with narrow ranges prevailing.

The dollar overall gained limited net support from the data releases, although underlying support was still fragile. The core PCE prices index will be watched closely on Friday for further evidence on underlying inflation trends. The dollar maintained a slightly firmer tone ahead of the data with EUR/USD retreating to around 1.2175 in early Europe.

US Treasuries lost ground following the US data releases with higher yields providing an element of US dollar support. Wall Street equities posted gains and there was a significant net loss of yen support amid reservations over Japanese fundamentals. In this environment, the dollar moved above the 109.50 level around the European close. Dallas Fed President Kaplan stated that the US economy was in recovery with strides towards the Fed’s goals. Kaplan reiterated that it’s time to think about moderating asset purchases sooner rather than later which provided an element of US dollar support.

The yen continued to lose ground against all major currencies with USD/JPY posting sharp gains to 7-week highs around 109.90.

Japan confirmed that the state of emergency would be extended until June 20th and the yen was hampered by further speculation that the Olympics could be cancelled. There was also further speculation that the Bank of Japan would extend the pandemic relief scheme and Japanese global equity weightings were cut. The Japanese currency was able to secure only a limited correction with USD/JPY around 109.85 while EUR/JPY traded around 133.80 and close to 3-year highs posted on Thursday.

Sterling was initially held in tight ranges on Thursday with markets looking for fresh incentives. According to Bank of England member Vlieghe the central projection is that the first rise in interest rates is likely to become appropriate only well into next year, with some modest further tightening thereafter. He did point to the possibility that a rate hike could come earlier in the first quarter of 2022, if the labour market trends were stronger than expected and supply pressures increased. As well as the hawkish scenario, he also noted the potential for downside risks in which case further stimulus could still be required.

Markets focussed on the hawkish scenario and provided the fresh impetus needed for a Sterling move. The UK currency posted strong gains following the commentary with a GBP/USD move to highs just above the 1.4200 level while GBP/EUR rallied to test the 1.1650 area.

Prime Minister Johnson noted the increase in Indian variant coronavirus cases and expressed some doubts whether the planned June 21st easing of restrictions would go ahead. There was a further increase in daily coronavirus infections according to the latest data.

Markets will be wary over position adjustment on Friday, especially with a UK holiday on Monday. Latest data recorded a further improvement in business confidence which helped underpin sentiment. GBP/USD held just below 1.4200 on Friday with GBP/EUR around 1.1650.

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