Sterling was hit by a strong correction after GBP/USD failed to hold 3-year highs.

Risk appetite held steady on Tuesday, although with evidence of increased nervousness over sustainability of reflation trades. US PMI data maintained uncertainty surrounding supply issues and inflation trends. US bond yields edged higher, but had only a limited wider impact. Wall Street equities were little changed as inflation concerns triggered important underlying uncertainty.

The dollar held above recent lows and rallied slightly amid inflation uncertainty. EUR/USD was unable to hold 1.2250 and drifted lower. Sterling was hit by a strong correction after GBP/USD failed to hold 3-year highs. Commodity currencies were unable to hold gains amid a tentative US dollar recovery. USD/CAD dipped to fresh 6-year lows before recovering.

The final reading for the Euro-Zone PMI manufacturing index was revised higher to 63.1 from 62.8 in the flash reading with a notably strong reading for the Italian index on the month. German unemployment declined 15,000 for May following an 8,000 increase the previous month and a slightly larger than expected decline. The data maintained confidence in the Euro-zone outlook, although the Euro was unable to make further headway after the European open.

The Euro-zone CPI inflation rate strengthened to 2.0% for May from 1.6% previously, the highest rate since November 2018 and above market expectations of 1.9% while the core rate increased to 0.9% from 0.8%. There will be tensions ahead of next week’s ECB policy meeting which curbed activity.

The dollar was unable to secure a significant recovery and tended to drift lower again into the New York open as markets monitored inflation developments.

The US ISM manufacturing index strengthened to 61.2 for May from 60.7 previously and slightly above consensus forecasts.  New orders increased at a faster pace, although there was a slowdown in production growth. There were further major supply difficulties during the month while the rate of employment growth slowed sharply. Prices increased at a slightly slower rate on the month, although overall cost pressures remained close to record highs.

The dollar initially edged lower following the release with concerns over the jobs data ahead of key data later in the week, although EUR/USD hit selling interest above 1.2250. The US currency stabilised later in the day with EUR/USD settling around 1.2225 amid some reluctance to sell the dollar aggressively given Federal Reserve policy uncertainty. The dollar held a slightly firmer tone on Wednesday with EUR/USD around 1.2215 as reflation trades faded.

The US dollar was unable to make headway into Tuesday’s New York open despite weak underlying yen sentiment. Although US yields edged higher after the US data, the US currency was unable to make headway and USD/JPY traded below the 109.50 level.

Markets continued to monitor inflation and Fed rhetoric closely. Fed Governor Brainard stated that the bank is still far from its goals, but seeing progress. She added that inflation and employment data reflect a temporary misalignment of supply and demand and also noted that she would be watching inflation data exceptionally closely.

Treasuries were little changed on Wednesday with US equities slightly lower. Markets continued to monitor Chinese yuan trends closely given the potential importance for global currency markets. Overall yen sentiment remained weak with the economy still being hit by coronavirus developments with a lack of mobility. USD/JPY posted a net advance to the 109.70 area in early Europe on Wednesday with EUR/JPY close to 134.0.

In comments on Tuesday, Bank of England Deputy Governor Ramsden stated that there was a risk that demand would get ahead of supply in the short term which could push prices higher. He also stated that the bank would not be complacent over prices. The rhetoric maintained speculation that the Bank of England would adopt a more hawkish policy stance over the next few months which provided initial Sterling support.

The final UK PMI manufacturing index was revised down to 65.6 from the flash reading of 66.1. There was a strong increase in new orders while employment increased at the fastest pace on record. Costs and selling prices both increased at the fastest pace on record while capacity constraints also increased.

After pushing sharply higher in early Europe, Sterling was unable to make further headway and posted significant losses into the New York open with further notable GBP/USD selling on approach to 3-year highs near 1.4250. There were no substantive comments on monetary policy from Bank of England Governor Bailey.

GBP/USD dipped to lows near 1.4150 late in the European session while GBP/EUR dipped to 1.1585. Sterling was unable to regain ground on Wednesday amid slightly more cautious risk conditions as GBP/USD traded around 1.4150.

Economic Calendar

09:30GBP Mortgage Approvals(MAY)92.30K82.74K
10:00Euro-Zone PPI (M/M)(MAR)4.20%4.30%
10:00Euro-Zone PPI (Y/Y)(MAR)1.10%
10:00RBA Assist Gov Debelle Speaks
13:30CAD Building Permits (M/M)(APR)5.70%
16:45German Buba President Weidmann speech
18:10European Central Bank President Lagarde Speaks
19:00Fed President Evans Speaks
19:00FOMC Brainard Speaks
23:30AiG Construction Index(APR)59.1

*All rates shown are indicative of interbank rates and should only be used for indication purposes only. It is important to note that foreign exchange rates fluctuate and that rates may vary depending on the amount and the base currency that is purchased or sold. Rates are correct as of 8:00am UK time. CentralFX are not responsible for the rates shown.