Currency-market volatility increased slightly during the day with positioning ahead of Thursday’s US inflation data and ECB meeting.

Currency-market volatility increased slightly during the day with positioning ahead of Thursday’s US inflation data and ECB meeting. US bond yields continued to move lower as US inflation expectations eased. Risk appetite held steady with equities protected by lower yields. Wall Street indices were little changed with Asian bourses ticking higher.

The dollar recovered from intra-day lows amid short covering ahead of the CPI data. EUR/USD failed to hold a move above 1.2200 to trade marginally lower. Sterling lost ground as UK-EU trade tensions dampened confidence.

Commodity currencies drifted lower as the US dollar recovered ground. There were no Bank of Canada policy changes with a muted reaction and USD/CAD edging above 1.2100.

The dollar was unable to make any headway ahead of Wednesday’s New York open with the currency undermined further by a lack of yield support. There were also further expectations of a Euro-zone recovery as coronavirus restrictions were eased which also underpinned the single currency.

EUR/USD moved above the 1.2200 level for the first time in over a week as the US currency remained under pressure and commodity currencies attempted to gain.

There was still an important element of caution ahead of crucial US inflation data on Thursday. Overall currency-market ranges were wider during the day amid positioning ahead of key events. In this environment, there was a reversal in trends later in the day amid dollar short covering.

The latest ECB policy decision will be announced on Thursday with expectations that the central bank would look to adopt dovish rhetoric in order to curb any tightening of financial conditions. According to sources, the ECB will also hold a three-day meeting to discuss the inflation strategy review.

The dollar secured a significant recovery towards the European close with EUR/USD also unable to hold above the 1.2200 level. With commodity currencies losing ground, EUR/USD retreated to lows near 1.2170. The dollar maintained a slightly firmer tone on Thursday ahead of the inflation data with EUR/USD around 1.2165.

US Treasuries moved higher in early New York trading with the 10-year yield dipping to below 1.50% which sapped dollar support and the US currency remained under wider pressure with a USD/JPY retreat to 109.20.

There was only a small rebound in yields, but the dollar did recover some ground as volatility increased. As the US currency continued a wider recovery, USD/JPY advanced to highs around 109.65 at the European close while yen sentiment remained weak.

There were reports that the Japanese government was considering a large economic stimulus package ahead of a general election which is scheduled for October.

Markets continued to monitor US-China relations with reports of positive dialogue between the commerce ministries. There were further suggestions from the Chinese foreign exchange regulator that there would be increased two-way fluctuations in the yuan in the future. There were still market expectations that the central bank would look to curb any further near-term currency gains.  USD/JPY consolidated just above 109.50 at the European open with EUR/JPY around 133.20.

Bank of England Chief Economist Haldane reiterated that the UK economic recovery was very strong, and he also expressed significant concerns over the potential for higher inflation. He noted that higher costs and wages would feed through into higher prices and that the Bank of England would need to consider whether asset purchases should be scaled back. Rhetoric from bank officials will continue to be watched closely.

Sterling strengthened after the comment but was unable to sustain the advance with further GBP/USD selling interest close to the 1.4200 level.

The latest EU-UK talks over the Northern Ireland protocol made no headway and there was tough rhetoric from the EU with a stronger warning that the UK should comply with the Withdrawal Agreement and not take further unilateral action surrounding Northern Ireland trade procedures.

Markets have not tended to react to trade headlines over the past few weeks, but the latest EU rhetoric did have an impact with the UK currency losing ground. There was a GBP/USD dip back below 1.4150 while GBP/EUR dipped to near 1.1590.

UK housing data remained very strong with the RICS housing index strengthening further to 83 for May from 75 the previous month, the strongest reading since 1988. There were further important concerns over a lack of supply which continued to put upward pressure on prices.

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