US data overall was mixed, but with a solid underlying tone as business sentiment held firm.

US data overall was mixed, but with a solid underlying tone as business sentiment held firm. Risk appetite gradually deteriorated, however, amid reservations over coronavirus developments.

US bond yields moved lower as risk appetite retreated. Wall Street stocks lost ground, although overall ranges were limited. European equities retreated while Asian bourses lost ground late in the session.

The dollar posted net gains, trading just below the middle of July’s range. EUR/USD dipped to lows at 1.1800 with no significant recovery. Sterling spiked after hawkish rhetoric from BoE Saunders before fading sharply from intra-day highs. Commodity currencies dipped sharply in New York amid a firm dollar and weaker equities.

The Euro was unable to make any headway ahead of the New York open on Thursday with EUR/USD selling on approach to 1.1850.

The US Philly Fed manufacturing index weakened to 21.9 for July from 30.7 previously and below consensus forecasts of 28.1. There was also a slowdown in the rate growth in production and new orders. There was further strong growth in employment, but there was slight moderation in the rate of price increases from 42-year highs previously. Companies remained optimistic over the outlook and there were expectations that supply-side issues would ease over the second half of the year.

The New York Fed manufacturing index strengthened sharply to 43.0 from 17.4 in June and substantially above market expectations on the month. There was also a strong increase in new orders and production rates on the month. There was a slight easing of upward pressure on delivery times while price indicators were mixed.

Initial jobless claims declined to a 16-month low of 360,000 in the latest week from 386,000 previously and below consensus forecasts while continuing claims declined to 3.24mn from 3.37mn the previous week which maintained underlying confidence in the jobs market.

The dollar gradually gained traction during the New York session with EUR/USD retreating to lows at the 1.1800 level as commodity currencies moved lower.

Risk conditions attempted to stabilise on Friday and EUR/USD traded just above 1.1800, although the dollar overall held firm with solid underlying demand.

US Treasuries edged higher ahead of the New York open with bond yields edging lower with the 10-year yield below 1.35% while equity futures moved lower. US industrial production increased 0.4% for June after a revised 0.7% increase the previous month and slightly below market expectations.

USD/JPY found support near 109.75 and regained ground as yields moved higher, but struggled to break back above the 110.00 level.

St Louis Fed President Bullard continued to push for a tapering of bond purchases while Chicago President Evans maintained a more cautious stance with expectations of a first rate hike in 2024, although it would not take much to move this to 2023. Fed Chair Powell emphasised the unprecedented nature of the current spike in inflation and that the Fed will continue to monitor developments closely. Treasury Secretary Yellen stated that there will be several more months of rapid inflation ahead.

The yen gained support on the crosses with USD/JPY trapped just below 110.00 and EUR/JPY retreating to below 130.0.

The Bank of Japan made no policy changes at the latest meeting with the 10-year yield target held at 0.0%. The bank downgraded GDP forecasts slightly for this fiscal year. Reaction was muted with USD/JPY trading near 110.00 in early Europe while EUR/JPY was held below 130.0.

Sterling initially secured gains following the UK jobs data with optimism over labour-market trends, although there was a quick reversal with losses after equity markets opened. Markets were uneasy over the further sharp increase in coronavirus cases and risk of disruption to economic activity.

Bank of England monetary policy committee member Saunders expressed increased concerns over the inflation outlook with a risk that there would be a rate of 3.5-4.0% late in the year. He also warned over the risk that not all inflation pressures would be transitory. In this context, he noted that the conditions for being able to tighten monetary policy had been met and he added that it could be appropriate to remove some of the policy accommodation relatively quickly with an ending of bond purchases. He did not make a specific forecast, but suggested that he would back a cut in bond purchases at the August policy meeting.

Sterling moved sharply higher following Saunders’ comments with a GBP/USD push to near 1.3900 and GBP/EUR also weakened from its highs to around 1.1700.

Sterling was unable to hold the gains and gradually moved lower in US trading with a weaker tone in risk appetite contributing to the loss of support. Overall, there was a GBP/USD retreat to near 1.3800 and GBP/EUR rallied to 1.1750. Sterling attempted to recover some ground on Friday, but underlying caution prevailed.

Economic Calendar

10:00Euro-Zone Trade Balance(MAY)10.9B
10:00Euro-Zone CPI (Y/Y)(JUL)2.00%1.90%
10:00Euro-Zone CPI (M/M)(JUL)0.30%
13:15CAD Housing Starts(JUN)275.9K
13:30USD Core Retail Sales (M/M)(JUN)-0.70%
13:30USD Advance Retail Sales (M/M)(JUN)-1.30%
13:30CAD Wholesale Sales (M/M)(JUN)1.10%0.40%
13:30CAD Foreign Securities Purchase(MAY)9.95B
15:00USD Business Inventories(MAY)-0.20%
15:00USD Michigan Consumer Sentiment(JUN 01)85.5
18:00USD Baker Hughes US Oil Count376
21:00USD TIC Net Long-Term(MAY)100.7B

*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.