Tight ranges prevailed on Monday with caution ahead of Wednesday’s Federal Reserve policy decision.

Tight ranges prevailed on Monday with caution ahead of Wednesday’s Federal Reserve policy decision. US bond yields moved higher on the day, although the impact was measured. Wall Street equities posted net gains and European bourses held firm. Asian equities were mixed with a retreat in China.

The dollar was unable to hold an initial advance against European currencies and posted a slight net loss. The yen retreated amid higher US yields with USD/JPY just above 110.00. EUR/USD settled above 1.2100 amid Euro-zone recovery expectations. Sterling was held in tight ranges with GBP/USD support below 1.4100. Commodity currencies advanced to post slight gains as the US dollar faded.

Euro-zone industrial production increased 0.8% for April, above consensus forecasts of 0.4%, with an annual increase of 39.3% given that there was a slump in output last year during the first lockdown. Overall confidence in an economic rebound continued with a gradual easing of coronavirus restrictions.

ECB council member Holzmann stated that the bank is in a dangerous zone as inflation concerns rise, but also that it was too early to talk about ending bond buying. Markets continued to expect that the central bank would continue to back very supportive financial conditions which limited Euro support.

After holding a firm tone in early Europe, the dollar was unable to make further headway with EUR/USD support below the 1.2100 level and the US currency edged lower into the New York open as commitment remained limited.

There was a significant element of caution ahead of Wednesday’s Federal Reserve policy decision, but also expectations that the central bank would be extremely slow in removing policy stimulus which limited the potential for sustained US currency support.

Overall, EUR/USD settled around 1.2120 at the European close as relatively narrow ranges prevailed. Activity remained limited with further caution ahead of Wednesday’s Fed policy decision and overall volatility remained at very subdued levels with expectations that central banks overall would maintain very accommodative policies. The dollar was unable to make headway on Tuesday ahead of the latest retail sales data due later in the day and EUR/USD traded around 1.2125 in early Europe.

US Treasuries lost ground just after the New York open with the 10-year yield strengthening to near the 1.50% level. Higher yields were significant in underpinning the US currency and there were also significant yen losses as overall confidence in the Japanese currency remained very fragile. Although the dollar drifted weaker elsewhere, there were USD/JPY gains to near 110.00 ahead of the European close as yen sentiment remained subdued.

US currency sentiment held firm later in the session with USD/JPY battling resistance just above 110.00 as risk appetite held steady.

The Bank of Japan will announce its latest policy decision on Friday. There were reports that the central bank would extend the coronavirus relief programme beyond September, but monetary policy is expected to remain on hold and overall yen sentiment remained fragile. Chinese equity markets lost ground following Monday’s holiday while there were no major developments in currency markets as narrow ranges prevailed with the yuan slightly lower following Monday’s holiday.

US yields edged lower again in Asia on Tuesday, but USD/JPY held just above the 110.00 level with EUR/JPY close to 133.50.

Sterling continued to drift lower in early Europe on Monday with some further disappointment that the planned English easing of coronavirus restrictions on June 21st would be delayed for four weeks. There were, however, still expectations that the UK economic recovery would continue. GBP/USD did, however, find support below the 1.4100 level and edged back above this level as the US currency faded. GBP/EUR found resistance close to 1.1665 and recovered to near 1.1639.

Bank of England Governor Bailey stated that managing the bond-buying programme would be a major challenge, but there were no direct references to monetary policy and bank officials should be in a blackout period ahead of next week’s policy decision.

Prime Minister Johnson confirmed that the easing of coronavirus restrictions which had been due on June 21st would be delayed until July 19th. There was little reaction in currency markets given that the announcement had been flagged strongly in advance.

The UK government announced that an outline free trade deal had been signed with Australia. The UK unemployment rate edged lower to 4.7% from 4.8% while there was a stronger than expected increase in payrolls for the month.

Economic Calendar

06:45SECO Economic Forecasts
07:00GBP Average Earning Including Bonus(APR)4.90%4.00%
07:00GBP Claimant Count Change(M/M)(MAY)-15.1K
07:00GBP Unemployment Rate(APR)4.70%4.80%
07:00Germany CPI (M/M)(MAY)0.50%0.70%
07:00Germany CPI (Y/Y)(MAY)2.50%2.00%
07:00Germany Harmonised CPI (M/M)(MAY)0.30%0.50%
07:00Germany Harmonised CPI (Y/Y)(MAY)2.40%2.10%
09:00CPI (EU Norm) Prelim YY(MAY)1.10%1.30%
09:00CPI (EU Norm) Prelim MM(MAY)0.00%
09:00CPI (EU Norm) Final MM*(MAY)0.00%
09:00CPI (EU Norm) Final YY*(MAY)1.30%
10:00Euro-Zone Trade Balance(APR)15.8B
13:30USD PPI Ex Food & Energy (M/M)(MAY)0.40%0.70%
13:30USD PPI Ex Food & Energy (Y/Y)(MAY)4.10%
13:30USD PPI (Y/Y)(MAY)6.20%
13:30USD PPI (M/M)(MAY)0.60%
13:30USD Core Retail Sales (M/M)(MAY)0.40%-0.80%
13:30USD Advance Retail Sales (M/M)(MAY)-0.80%0.00%
14:15USD Industrial Production(MAY)0.70%0.50%
14:15USD Capacity Utilization(MAY)75.00%74.90%
15:00USD Business Inventories(APR)-0.10%0.30%
15:00NAHB Housing Market Index(MAY)8383
21:00USD TIC Net Long-Term(APR)262.2B

*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.