Inflation expectations increased across US and global markets on Thursday.

Inflation expectations increased across US and global markets on Thursday. Fed commitment to a dovish policy had an important impact in underpinning risk appetite and had wider implications. Wall Street was held in narrow ranges for much of the day, but posted significant closing gains on expectations of Fed support.

US nominal yields edged lower which curbed dollar demand. Negative real rates pushed the dollar to 1-week lows. EUR/USD posted net gains to above 1.2050. Sterling failed to gain sustained support from the Bank of England statement as global elements dominated.

Commodity currencies posted net gains amid a weaker US dollar. USD/CAD dipped to fresh 39-month lows amid firm Canadian sentiment. Norges Bank rate-hike expectations were already priced into the krone which held steady.

Euro-zone retail sales increased 2.7% for March with a year-on-year increase of 12.0% after a 1.5% decline previously. EU Commission President von der Leyen stated that the vaccination campaign is a success and there has been an element of market relief that the overall rate of vaccination has been increasing. The dollar dipped lower in early Europe on Thursday and was unable to regain ground ahead of the New York open.

US initial jobless claims declined to 498,000 in the latest week from a revised 590,000 the previous week and below consensus forecasts of 540,000 while continuing claims increased slightly to 3.69mn from 3.65mn previously. The data maintained expectations of a strong labour market, but the dollar failed to benefit given increased conviction that the Federal Reserve would not adjust monetary policy.

Given increased inflation fears, the dollar was undermined by persistently negative real interest rates. Commodity currencies posted only limited gains, but the dollar index dipped to 1-week lows. The Euro continued to edge higher with a EUR/USD move above the 1.2050 level.

Reaction to the latest employment data will be watched closely on Friday with expectations of a strong report fuelled by news that President Biden would hold a press conference after the release. Expectations of negative real interest rates continued to sap dollar support on Friday with EUR/USD around 1.2060 in early Europe.

The dollar was unable to draw support from the labour market data and edged lower amid the wider soft tone with a USD/JPY retreat to near 109.00.

Dallas Fed President Kaplan reiterated that he expected conditions for a Fed lift off to be met sometime in 2022. He also noted that strong demand and labour shortages are two reasons why the inflation rise may not be temporary. The hawkish rhetoric had little overall impact amid expectations that the Washington Governors and a majority of regional banks were determined to maintain a dovish policy stance. Cleveland President Mester, for example, stated that the Fed will continue to buy assets and maintain an accommodative policy even after the requirements for tapering have been fulfilled.

The Federal Reserve Financial Stability Report warned that asset prices could be vulnerable if risk appetite falls, although the central bank overall did not signal significant alarm over the situation.

The Chinese Caixin PMI services index strengthened to a 4-month high of 56.3 for April from 53.1 and above consensus forecasts. Chinese trade data also posted strong annual growth in exports and imports, although April 2020 data was notably weak. Overall risk appetite held steady with USD/JPY just above the 109.00 level.

The UK PMI services index was revised to a 7-year high of 61.0 for the final reading from the flash reading of 60.1 with a composite output index reading of 60.7. Companies remained optimistic over the outlook amid economic re-opening while there was further strong upward pressure on prices.

The Bank of England held interest rates at 0.1%, in line with expectations. There was no change to the total asset-purchase programme, although chief economist Haldane dissented and called for a cut in purchases. The bank did make a technical adjustment to slow the rate of bond purchases and Sterling rallied after initial losses.

There was a sharp upgrade to the 2021 GDP growth forecast to 7.25%, although the 2022 outlook was cut slightly. The short-term inflation forecast was increased, but the bank expects that the increase in inflation will be temporary. In this context, the bank reiterated that it would be very cautious in raising interest rates.

Governor Bailey expected that higher inflation would be transitory, although markets were less convinced.

There was choppy Sterling trading following the decision with the rhetoric overall not seen as hawkish enough to provide currency support. GBP/USD was unable to hold above 1.3900 while GBP/EUR dipped towards 1.1500 before a limited correction. The Scottish election result will not be known on Friday while the Conservative Party easily won the Hartlepool by-election. Sterling posted limited net gains with GBP/USD trading above 1.39 with GBP/EUR around 1.1500.

Economic Calendar

07:00German Industrial Production (M/M)(MAR)2.30%-1.90%
07:00German Trade Balance(MAR)19.5B18.9B
07:45Industrial Output MM(MAR)2.00%-4.70%
09:30GBP PMI Construction(MAR)61.7
13:30USD Average Hourly Earnings (M/M)(APR)-0.10%
13:30USD Average Hourly Earnings (Y/Y)(APR)4.20%
13:30United States Unemployment Rate(M/M)(APR)6.00%
13:30USD Private Nonfarm Payrolls (APR)780K
13:30USD Non-farm Payrolls(M/M)(APR)916K
20:00USD Consumer Credit(MAR)27.58B

*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.