Markets wary over an expected delay to the re-opening measures on June 21st.

Risk appetite was slightly more cautious on Friday with position adjustment in evidence. US bond yields failed to hold intra-day highs despite inflation concerns. Wall Street equities posted tentative gains on underlying earnings and liquidity hopes. Holidays in Asia dampened activity on Monday.

The dollar gained sharply after Friday’s New York open with short covering ahead of Wednesday’s Fed policy decision. EUR/USD dipped to lows below 1.2100 with narrow ranges on Monday as the dollar held firm. Sterling overall held steady despite a GBP/USD retreat to near 1.4100. Commodity currencies retreated as the US dollar recovered ground.

ECB council member Knot stated on Friday that there are some upside risks slipping into the inflation outlook, although he is one of the more hawkish members of the council. He added that the ECB is absolutely capable of controlling inflation. The Euro was unable to make any further headway after the European open with no further EUR/USD attack on the 1.2200 level as dollar short covering kicked in.

The University of Michigan consumer confidence index strengthened to 86.4 for June from 82.9 from previously and above consensus forecasts of 84.0. There was a small improvement in the current conditions component and larger gain for the expectations index.

The one-year inflation expectations index declined to 4.0% from 4.6% the previous month while the 5-year index edged lower to 2.8% from 3.0%.

The US dollar continued to gain ground later in the session with EUR/USD dipping to just below the 1.2100 level as the US currency secured wider support on short covering while commodity currencies posted significant net losses into the close as overall volatility increased.

There was little change in long Euro positions according to the latest CFTC data with the Euro vulnerable to a sharp adjustment if there is a dip in risk appetite. The data also illustrated that there is scope for significant dollar short covering if confidence in a weaker dollar declines. In this context, there was caution ahead of Wednesday’s Federal Reserve policy decision given the possibility of a more hawkish statement and shift in the timing of an expected rate hike.

The dollar held a slightly firmer tone on Monday with EUR/USD just below 1.2100 as ECB President Lagarde reiterated that it was too early to discuss any reduction of bond purchases.

The dollar posted net gains in the New York session on Friday with a USD/JPY peak around 109.85. US yields failed to hold peak levels during the day and USD/JPY edged lower to 109.70 at the New York close.

CFTC data recorded a decline in short yen positions to 37,000 in the latest week from 47,000 previously which suggested a slightly more cautious tone surrounding risk conditions during the week and a reluctance to sell the Japanese currency.

Chinese markets were closed for a holiday on Monday which dampened trading volumes and curbed activity. Markets will continue to monitor rhetoric from Beijing officials closely in the short term given potential resistance to further yuan gains which would help underpin the US currency.

There should be no comments from Federal Reserve officials ahead of Wednesday’s policy decision, although markets will be wary over any unofficial briefings.

Overall yen sentiment remained weak with USD/JPY trading around 109.75 and EUR/JPY below 133.00.

Sterling was unable to gain any significant support from the UK data releases on Friday. The GDP data was close to expectations as weakness in the industrial sector offset a rebound in services. The latest NIESR report estimated that GDP increased 1.5% for May following the 2.3% gain for April with a further 0.9% advance for June which would give an annual increase of 16.1%, but there were still reservations over the underlying economic trends.

Markets were also wary over an expected delay to the re-opening measures on June 21st. Prime Minister Johnson is due to make a decision on Monday.

The UK currency held a firm overall tone, although to an important extent this was due to a lack of confidence in the Euro and dollar rather than any great enthusiasm for Sterling.

There were some underlying concerns over Brexit tensions, although G7 leaders attempted to focus elsewhere which limited the potential currency impact. There were further reports that the planned final easing of business restrictions on June 21st would be delayed for four weeks. GBP/USD held just above 1.4100 on Monday with GBP/EUR edging higher to 1.1660 as global equity markets held steady.

Economic Calendar

07:30CHF PPI (M/M)(MAY)0.70%
07:30CHF PPI (Y/Y)(MAY)1.80%
10:00Euro-Zone Industrial Production (M/M)(APR)0.10%
10:00Euro-Zone Industrial Production (Y/Y)(APR)10.90%
13:30CAD Manufacturing Shipments (M/M)(APR)3.50%3.50%

*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.