BoE’s Bailey watching the data.
German consumer prices increased 0.8% for February with the year-on-year inflation rate unchanged at 8.7% and above consensus forecasts of 8.5%.
Bundesbank President Nagel stated that significant increases in interest rates are necessary beyond the March increase. Markets are pricing around a 65% chance that the ECB will hike by 50 basis points in March with the remainder expecting a 75 basis-point hike.
Hawkish Bundesbank rhetoric and optimism over a rebound in the Chinese economy triggered Euro buying on Wednesday, especially on the major crosses.
The US ISM manufacturing index increased marginally to 47.7 for February from 47.4 the previous month, but slightly below consensus forecasts and remained in contraction territory for the fourth successive month. New Orders and production also remained in contraction for the month and there was a small decline in employment for the month.
The prices index moved back into positive territory with a reading of 51.3 from 44.5 previously and stronger than expected.
Treasuries lost ground after the US data with concerns that inflation would remain higher than expected and force a more aggressive Federal Reserve stance.
The 10-year yield increased to near 4.00% and moved above this level to 6-month highs on Thursday.
Higher US yields hampered risk appetite and unsettled equity markets amid fears that interest rates will have to stay stronger for longer.
Bank of England Governor Bailey stated that he would advise caution in suggesting that the central bank was done with rate hikes or that further rate hikes were inevitable.
He added that some further rate hikes could be appropriate, but nothing is decided and he reiterated that the bank is data dependent in decision making.
The latest Euro-Zone inflation data will be released on Thursday. Consensus forecasts are for a decline in the annual rate to 8.3% from 8.6%, but the whisper number will be higher.
The Euro posted gains after the European open with optimism over stronger growth in China. Hawkish Bundesbank rhetoric also underpinned the single currency. A weaker dollar propelled EUR/USD to highs just above 1.0690. The dollar regained ground as yields increased and equities moved lower. The Euro maintained a strong tone on the crosses with EUR/USD around 1.0650. EUR/USD was held around 1.0640 on Thursday.
There was very choppy yen trading during the day. From 136.40 highs, USD/JPY dipped sharply to 135.20 before reversing losses as US yields increased. Higher US yields pushed USD/JPY to 136.70 on Thursday.
The Swiss franc lost ground amid hawkish Bundesbank rhetoric and higher US yields. EUR/CHF strengthened to 1-month highs around 1.0030 with USD/CHF holding above 0.9400 and advancing to 0.9430 on Thursday.
Sterling lost ground with relatively dovish BoE rhetoric and no further support from the trade deal. GBP/USD dipped to lows around 1.1965 with strong EUR/GBP gains to 0.8900 before consolidation around 0.8875. GBP/USD was held below 1.2000 on Thursday at around 1.1975.
Commodity currencies posted a net advance on optimism over China, but retreated from intra-day highs. AUD/USD settled around 0.6750 before a retreat to 0.6735 on Thursday amid fragile risk appetite. USD/CAD settled around 1.3615 from 1.3585 lows and held firm on Thursday.
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