Markets price in more Bank of England rate hikes.

The German IFO business confidence index dipped to 91.7 for May from a revised 93.4 the previous month and below consensus forecasts of 93.0. There was a small decline in the current-conditions component and a steeper retreat for the expectations component.

According to the IFO, the economy is heading towards stagflation in the second quarter of the year.

Fed Governor Waller stated that the decision whether or not to raise rates in June will depend on the data releases over the next three weeks. He added that prudent risk management may suggest skipping a rate hike in June and lean towards a July move depending in inflation data and whether credit conditions have tightened excessively.

He added that he does not expect that the data in the next couple of months to make it clear that the terminal interest rate has been reached. He also noted that he did not backing stopping rate hikes unless there is clear evidence that inflation is moving down to the 2% target.

According to minutes from May’s policy meeting, several members stated that further policy firming may not be needed if the economy evolves in line with their expectations. Some participants, however, considered that additional firming would likely be warranted.

Participants also agreed that inflation was unacceptably high and declining slower than expected.

Futures markets indicated just over a 70% chance that the Fed will hold rates steady at the June policy meeting.

The dollar weakened at time on Wednesday, but held a firm overall tone on expectations that the Federal Reserve would have to maintain a hawkish policy.

There was also a lack of confidence in the Euro-Zone and Chinese economies which underpinned the US currency with the dollar index at 2-month highs.

Following the latest inflation data, markets priced in at least two further Bank of England rate hikes to 5.00% and potentially 5.25%.

The latest US jobless claims data will again be watched closely on Thursday.

Consensus forecasts are for an increase in initial claims to 249,000 from 242,000.

House Speaker McCarthy stated that a deal in principle could be agreed over the weekend, but two ratings agencies warned that there would be an impact on the US credit rating.

The Euro drifted lower after the German IFO data. The dollar maintained a firm underlying tone amid a lack of confidence in the global outlook. EUR/USD dipped to lows just below 1.0750 on Wednesday. There was no relief on Thursday with EUR/USD at 2-month lows near 1.0730.

The yen lost further ground on expectations of a hawkish Fed stance. USD/JPY posted highs just below 139.40 before a limited correction. USD/JPY posted fresh 6-month highs at 139.70 on Thursday.

The Swiss franc lost ground on expectations of hawkish global central banks. EURCHF settled around 0.9735, USD/CHF advanced to above 0.9050.

Sterling failed to hold initial gains after the UK inflation data despite expectations of more aggressive BoE rate hikes. GBP/USD dipped to 7-week lows at 1.2330 while EUR/GBP recovered from 6-month lows at 0.8650 to trade close to 0.8700.

Commodity currencies remained firmly on the defensive amid US dollar strength and weak equities. AUD/USD retreated to 6-month lows around 0.6525 before a marginal recovery. USD/CAD strengthened to 3-week highs at 1.3600 despite firm oil prices.

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