The dollar posted further strong gains to 10-week highs and held firm on Monday.

Risk appetite deteriorated on Friday with fears over higher US interest rates and confidence remained fragile on Monday. US bond yields, however, moved lower on the day with the 10-year at 16-week lows around 1.40%.

Wall Street equities posted sharp losses with futures also losing ground on Monday. Global equity markets also moved notably lower despite resilience in China.

The dollar posted further strong gains to 10-week highs and held firm on Monday. EUR/USD dipped to fresh 2-month lows below 1.1850 before a correction. Sterling posted significant losses, especially with weaker risk conditions as GBP/USD tested the 1.3800 area. Commodity currencies posted sharp losses as the US dollar strengthened and equities declined.

The Euro-zone current account surplus widened to EUR22.8bn for April from EUR17.8bn the previous month. The surplus amounted to EUR288bn in the 12 months to April and 2.5% of GDP from EUR239bn the previous year. The data provided only limited currency support given evidence of capital outflows.

The Euro attempted to recover ground ahead of Friday’s New York open with a limited correction after heavy losses. Overall gains, however, were limited given that underlying dollar sentiment remained stronger with expectations that the ECB would welcome the weaker currency.

In comments on Friday, St Louis Fed President Bullard stated that the Federal Reserve has been surprised on the upside during the last six months. Although he welcomed upside inflation risks because that was want the central bank wanted, he also stated it was only reasonable to lean hawkish.

He also warned over the risk of adding to froth in the housing sector and indicated that it would be prudent to stop buying Mortgage-backed securities. He also noted that his dot represented a rate lift-off in late 2022. The dollar posted fresh gains following the comments with EUR/USD dipping back below the 1.1900 level.

Minneapolis head Kashkari stated that the central bank should maintain a very patient approach and that high inflation readings should be short-lived. In this context, he stated that interest rates should remain at current levels at least through 2023. The impact was limited as Kashkari has consistently been on the very dovish end of the spectrum. Overall, EUR/USD dipped to fresh 2-month lows at 1.1850 with only a very limited correction as the dollar was boosted by expectations of a further covering of short positions.

The latest CFTC data will be watched closely as it will illustrate the position ahead of the Federal Reserve statement and give some indication of the scale of potential position adjustment. Comments from Fed officials will also continue to be monitored closely with EUR/USD around 1.1870 on Monday amid a fragile correction.

There were sharp gains in US Treasuries during Friday with the 10-year yield sliding to lows below 1.45% and compared with highs around 1.58% immediately after Wednesday’s Federal Reserve statement. US equities came under significant pressure with the S&P 500 index declining 1.3% on the day. USD/JPY was unable to challenge 110.50 and retreated as US yields moved lower while the yen gained some support from weaker equity markets.

In this environment, USD/JPY retreated to around 110.20 and the yen also posted significant gains on the crosses with EUR/JPY below 131.0.

The Chinese central bank held interest rates steady after the latest policy meeting and in line with consensus forecasts, although there were concerns over power shortages and the potential for further supply-chain difficulties which would maintain upward pressure on prices.

US bond yields continued to decline on Monday with some safe-haven demand for Treasuries as equity markets retreated sharply. Risk appetite remained fragile as equity markets weakened which helped protect the yen and USD/JPY dipped below the 110.00 level with lows near 109.70 before a slight recovery.

Sterling continued to lose some ground after the weaker than expected retail sales data. Global risk conditions were important with a notably more defensive tone developing during the day as equities moved lower. The UK currency is notably more vulnerable to selling pressure when risk appetite is weaker.

There were some concerns over Brexit tensions and Sterling was unable to secure support from expectations that the Bank of England would adopt a slightly more hawkish policy stance. GBP/USD declined to lows just below 1.3800 while EUR/GBP recovered to near 0.8600 despite weakness against the dollar.

Rightmove reported an increase in housing asking prices of 0.8% for June from 1.8% previously with demand still very strong and supply shortages. Prices increased 7.5% over the year, although with signs of a slight slowdown in transactions. Sterling was unable to sustain headway on Monday as global risk appetite remained notably fragile with selling interest on rallies.

Economic Calendar

12:00German Buba Monthly Report
13:30USD Chicago Fed National Activity Index(MAY)0.24
15:15European Central Bank President Lagarde Speaks
20:00FOMC member John C. Williams speech

*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.