Sterling was also hampered by doubts surrounding the UK government strategy to remove most coronavirus restrictions.
Risk appetite remained very fragile on Thursday, although with a tentative recovery late in the session and some easing of volatility on Friday.
US bond yields recovered from fresh 4-month lows on Friday as risk conditions attempted to stabilise. Wall Street equities pared losses later in the session. European stocks retreated sharply while Asian equities were mixed with a recovery from intra-day lows.
The dollar overall was mixed with a retreat against safe-haven currencies and net losses on a trade-weighted basis. The Euro secured net gains on a closing of carry trades funded through the currency, but EUR/USD selling above 1.1850. Sterling dipped sharply as global risk conditions dominated. Commodity currencies weakened sharply as global markets took fright.
The dollar maintained a strong tone in early Europe on Thursday with further defensive demand as commodity currencies declined and equity markets moved lower. The Euro, however, was resilient and posted net gains amid a closing of carry trades funded through the single currency.
After finding support below the 1.1800 level, EUR/USD secured net gains to around 1.1840 ahead of the New York open despite commodity currency losses.
The ECB confirmed that it will now adopt a 2% inflation target compared with the previous aim of a rate close to but just below 2%. The bank also confirmed that the target will be symmetric while the cost of housing will gradually be included in the inflation index. The changes were in line with earlier leaks and there are strong market expectations that an expansionary policy would be sustained over the next few months at least. The Euro was able to resist further selling pressure amid short covering.
US initial jobless claims increased marginally to 373,000 in the latest week from a revised 371,000 previously and significantly above consensus forecasts of 350,000. Continuing claims declined to 3.34mn from 3.48mn while there was a further net decline in pandemic emergency claims.
Risk appetite attempted to stabilise after the US data and Wall Street open, although overall sentiment remained fragile. Overall, there was a tentative reversal in trends with EUR/USD retreating to around 1.1840 from highs near 1.1870 as the dollar held below 3-month highs.
Markets will continue to monitor rhetoric from Federal Reserve officials closely with Chair Powell scheduled to testify to Congress next week. The dollar maintained a firm underlying tone on Friday with EUR/USD around 1.1835 as risk conditions were monitored closely with scope for further volatility during the day.
Japan confirmed that a state of emergency would be in place in Tokyo for the next month, although there was still uncertainty over rules which would be in place surrounding the Olympics. There were also reports that the Bank of Japan will lower its economic projections in next week’s quarterly forecasts.
Risk appetite dipped further in early Europe on Thursday and USD/JPY dipped below the 110.00 level which triggered stop-loss dollar selling while EUR/JPY also dipped below the 130.0 level with an aggressive covering of short yen positions.
US yield also continued to decline which pushed USD/JPY to lows just above 109.50. There was a tentative recovery later in New York with USD/JPY rallying to 109.80 as Wall Street indices pared losses. San Francisco Fed President Daly stated that it would be premature to declare victory against coronavirus and that there was a threat from the Delta variant.
China’s CPI inflation rate was slightly below market expectations and producer prices increased 8.8% in the year to June from 9.0% previously. US equity future edged lower on Friday while there was a significant recovery in US bond yields with USD/JPY edging just above the 110.00 level before stalling and EUR/JPY just above 130.0.
Sterling continued to lose ground in early Europe on Thursday with the UK currency undermined by a further slide in risk conditions as equity markets declined sharply.
Sterling was also hampered by doubts surrounding the UK government strategy to remove most coronavirus restrictions from July 19th, especially with coronavirus infection rates continuing to increase. Global developments dominated during the day as overall volatility increased sharply.
GBP/USD slid to lows below 1.3750 before a limited recovery while GBP/EUR dipped sharply towards 1.1600.
Markets will monitor rhetoric from Bank of England officials closely in the short term. UK GDP increased 0.8% for May after a 2.3% gain previously and below expectations of 1.5%. The latest industrial production data was again weaker than expected with manufacturing edging lower on the month.
|07:00||GBP Industrial Production (M/M)(MAY)||1.50%||-1.30%|
|07:00||GBP Industrial Production (Y/Y)(MAY)||21.60%||27.50%|
|07:00||GBP Manufacturing Production (M/M)(MAY)||1.00%||-0.30%|
|07:00||GBP Manufacturing Production (Y/Y)(MAY)||29.50%||39.70%|
|07:00||GBP Trade Balance Non EU(JUN)||-5.55B|
|07:00||GBP Trade Balance(JUN)||-10.96B|
|07:45||Industrial Output MM(JUN)||0.80%||-0.10%|
|09:00||Industrial Output YY WDA(MAY)||79.50%|
|09:00||Industrial Output MM SA(MAY)||1.80%|
|11:00||European Central Bank President Lagarde Speaks|
|13:30||CAD Full Employment Change(JUN)||-13.8K|
|13:30||CAD Employment Change (M/M)(JUN)||-68.0K|
|13:30||CAD Unemployment Rate (M/M)(JUN)||8.20%|
|13:30||USD Wholesale Inventories||1.10%|