Dollar continues to lose steam.

ECB council member Visco stated that a June rate hike was out of the question, but July was perhaps the time to start. Fellow member Villeroy stated that the inflation fight means normalising interest rates. He added that the central bank’s priority is fighting and mastering inflation.

Bundesbank head Nagel stated that negative interest rates are a thing of the past and added that more rate hikes could come in quick succession.

There are strong expectations that the ECB will raise rates at the July meeting with the scope for further increases before year-end.

In Australia’s general election there was a victory for the Labour Party, the first win for 10 years.

There is still uncertainty whether the government will have an overall majority or in coalition greens/independents as the party needs 4 more seats for an overall majority with 14 results still to be declared.

There will be expectations of increased fiscal support for the economy which provided an element of currency support. Reserve Bank of Australia assistant governor Kent stated that a neutral rate for interest rates is in the range of 2-3%.

Overall risk appetite held steady on Monday despite unease over the latest Chinese coronavirus developments with Beijing reporting a record number of cases.

The dollar regained some ground on Friday but was put back on the defensive on Monday as US yields moved lower. The prospect of increased interest rates across many global central banks sapped relative support for the US currency and there was significant position adjustment.

The dollar index overall dipped to fresh 2-week lows.

In comments on Friday, Bank of England chief economist Pill reiterated that the central bank faced its most difficult challenge for 25 years. He warned that inflation was liable to increase to above 10% and also commented that the tightening of monetary policy had some way to go.

This suggests that there is scope for several further rate increases over the next few months.

Sterling shorts stabilise.

CFTC data recorded a marginal decline in short Sterling contracts, but the figure was still above 79,000 and close to the highest level since 2019, maintaining the potential for short covering if there is a shift in UK sentiment.

There was choppy trading on Friday with the currency moves dominated by shifts in equities. Hawkish ECB rhetoric provided only limited further Euro support. EUR/USD dipped to 1.0530 lows before a recovery as equities rallied. The dollar lost ground on Monday with EUR/USD briefly trading at fresh 2-week highs above the 1.0600 level.

The US 10-year yield dipped below the 2.80% level before stabilising above this level. USD/JPY dipped to lows at 127.15 on Monday as lower US yields underpinned the yen before a recovery to 127.85 as equity futures posted gains. USD/CHF rallied to near 0.9750 from lows just below 0.9700, but stumbled again on Monday. EUR/CHF was held below the 1.0300 level.

Sterling moves were influenced strongly by risk conditions. The currency was underpinned by BoE’s Pill’s comments that interest rates would increase further. GBP/USD settled just below 1.2500 on Friday, but still posted the strongest weekly advance since late 2020 and advanced further to 1.2550 on Monday.  GBP/EUR rallied close to 1.1850 on Monday.

Commodity currencies overall edged lower on Friday, although with a rally from intra-day lows and there were net gains on Monday. AUD/USD posted solid net gains to fresh 2-week highs just above 0.7100 on Monday. USD/CAD settled around 1.2840 on Friday before a fresh test of support below 1.2800 on Monday.

Economic Calendar

09:00German Business Expectations(MAY)83.5086.7
09:00IFO - German Current Assessment(MAY)95.897.2
09:00German IFO Business Climate Index(MAY)89.191.8
23:45NZD Retail Sales (Q/Q)8.60%

*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.