EUR/USD dipped below 1.2200 after a retreat from 4-month lows.

Risk conditions were broadly stable on Wednesday as markets waited for fresh developments. US yields recovered from intra-day lows, but with the 10-year yield below 1.60%. Wall Street equities posted limited gains while global bourses were mixed.

The dollar recovered from 4-month lows on short covering and month-end demand, although underlying sentiment remained negative. EUR/USD dipped below 1.2200 after a retreat from 4-month lows. Sterling was unable to make headway with further reservations that recovery was priced in. Commodity currencies retreated as the US dollar recovered ground.

The Euro held a firm tone in early Europe on Wednesday, but was unable to extend gains and the dollar was able to recover some territory ahead of the New York open. There were further expectations of recovery in the Euro-zone economy which provided underlying Euro support, especially with an easing of coronavirus restrictions.

Markets were monitoring ECB rhetoric closely for any evidence whether opposition to Euro gains would increase.

There was some speculation that gains in the Chinese yuan would increase tolerance within the central bank for a stronger Euro, although markets were still wary over potential verbal intervention to cap gains and rhetoric will be monitored closely in the short term.

Overall risk conditions were slightly less confident which curbed the potential for further short-term dollar selling with the US currency recovering from 4-month lows and EUR/USD drifted lower after again failing to hold above the 1.2250 level.

The dollar gained fresh support into the London fix and maintained a firmer tone after the European close with EUR/USD dipping below the 1.2200 level. There is scope for further month-end position adjustment over the next two days, although overall volatility has remained subdued.

Fed Governor Quarles stated that it will be important to begin discussing plans to adjust asset purchases at upcoming meetings. Inflation is likely to meet the bar for tapering later this year, but labour market improvement will be slower. He added that the central bank may need more communication about what substantial progress means and does not expect will sustain a move above 2%.

Markets will watch the PCE prices data more closely than usual on Friday for further evidence on inflation. The dollar was unable to extend gains on Thursday, but EUR/USD traded just below the 1.2200 level as German consumer confidence recovered less than expected.

US Treasuries held a firm tone into Wednesday’s New York open with the US 10-year yield below 1.60% while the 5-year yield was below 0.80% which continued to sap underlying dollar support. US equity futures also lost ground which provided an element of yen protection.

Overall, USD/JPY failed to hold an initial move above 109.00. As the US currency gained wider support after the European close USD/JPY advanced to near 109.20.

Japan announced that employment and wages support will be extended until the end of July and overall confidence in the Japanese outlook remained weak which limited yen support. US equity futures drifted lower on Thursday, but overall risk conditions held steady with some support from relatively constructive rhetoric surrounding US-China trade talks, although US Trade Representative Thai stated that the US still faces large challenges with China across the board.

Chinese industrial profits data was strong with USD/JPY trading just above 109.00 as US bond yields traded marginally higher.

There were no significant UK economic data releases on Wednesday with markets tending to focus on the political drama of testimony to the House of Commons. Prime Minister Johnson’s former adviser Cummings made a sustained attack over the government’s coronavirus performance.  At this stage, markets assumed there would be only a limited impact on the government outlook despite strong criticism of Prime Minister Johnson and Health Secretary Hancock.

Sterling edged higher into the New York open, but was hampered after the New York open by a more fragile tone surrounding risk appetite. GBP/USD was unable to make an attack on the 1.4200 level and dipped back below the 1.4150 level.

Sterling also dipped lower into the London fix with some evidence of month-end selling as the dollar regained territory while GBP/EUR failed to hold above 1.1575.

Overall volatility levels, however, remained subdued during the day, especially against the Euro with the Bank of England expected to remain in neutral at this stage. GBP/USD dipped below 1.4100 in Asia before trading just above this level in Europe with the Euro around 0.8640.

Economic Calendar

07:00CHF Trade Balance(APR)5.816B
07:00German GfK Consumer Confidence (MAY)-3.5-8.8
09:00Consumer Confidence(MAY)102.3
09:00Business Confidence(MAY)105.4
13:30USD Durable Goods Orders Ex Transportation(APR)1.60%1.90%
13:30USD Durable Goods Orders (M/M)(APR)0.50%
13:30USD GDP (Annualized)4.20%6.40%
13:30USD GDP Price Index (Q/Q)2.00%4.10%
15:00USD Pending Home Sales (M/M)(APR)5.00%1.90%
15:00USD Pending Home Sales (Y/Y)(APR, 2020)111.30%

*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.