Risk appetite stabilised on Wednesday with no lasting damage from Yellen’s comments on Tuesday.

Risk appetite stabilised on Wednesday with no lasting damage from Yellen’s comments on Tuesday. Overall rhetoric from Fed officials was dovish which underpinned risk sentiment and bond yields edged lower.

Wall Street equities were little changed with small net gains for the S&P 500 index. Global equities recovered from losses the previous day with mixed trends in Asia.

The dollar posted a slight net advance on the day and touched two-week highs. EUR/USD tested support below 1.2000 before settling close to this level. Sterling held a firm tone, but with caution ahead of the BoE statement and GBP/USD settled around 1.3900. The Canadian dollar hit fresh 3-year highs, but tensions with China undermined the

The Euro-zone PMI services-sector index was revised higher to 50.5 for the final reading from the flash estimate of 50.3 with the composite output index at 53.8. There was a strong recovery for the services-sector index, but the Italian sector contracted at a faster pace.

The dollar posted net gains to 2-week highs in early Europe on Wednesday with EUR/USD dipping below 1.2000. It did recover some ground ahead of the US open, but was unable to make significant headway. ECB chief economist Lane stated that the acceleration of vaccines and locking of economies is built into ECB forecasts.

ADP data recorded an increase in private-sector payrolls of 742,000 for April, below consensus forecasts of 800,000, although there was an upward revision to the March increase to 565,000 from the original estimate of 517,000. Markets expect another strong employment report on Friday.

The PMI services-sector index was revised to 64.7 from the flash reading of 63.1 and this was the strongest reading since the data series began in late 2009.

The ISM services-sector index declined slightly to 62.7 from 63.7 and below markets expectations of 64.0, although this was still a historically strong rate of growth. There was also a slowdown in the rate of growth in new orders and business activity. There was, however, a faster rate of employment growth for the month while prices increased at the fastest rate since July 2008 with increases across all industry sectors.

The data did not shift the US narrative significantly with expectations of strong growth and rising inflationary pressures. EUR/USD found further support close to 1.2000, but was unable to pull away from this level and settled just above this level in early Europe on Thursday as a 3.0% increase in German factory orders provided some support.

The dollar edged higher ahead of the New York, but USD/JPY was unable to test the 109.50 area and edged lower after the Wall Street open. There was little overall move in Treasury markets which stifled activity despite a barrage of Fed rhetoric.

Chicago Fed President Evans stated that there was quite a long way to go before reaching goals and that policy was likely to be on hold for some time. He did state that the employment mandate was in sight which could be seen as a more hawkish shift, although he also stated that achieving the inflation goal may prove more difficult. He also stated that there would be no problem with a 3% inflation rate.

Boston head Rosengren stated that there was still significant slack in the economy and that the most likely outcome is that inflation will stabilise around 2.0%. He added that it was too early to talk about tapering bond purchases. Cleveland President Mester added that progress in the labour market does not meet Fed goals and there would be no reaction to strong data in the absence of inflation pressure.

Given that these two members are on the hawkish end of the spectrum, the comments were broadly dovish. Overall, USD/JPY consolidated around 109.25 on Wednesday and edged higher to the 109.40 area in Asia on Thursday.

Sterling held a firm tone during European trading on Wednesday with expectations that the Bank of England would take a more optimistic outcome over the outlook in Thursday’s policy statement. The potential Sterling support was offset by political uncertainty and caution ahead of key events which also tended to dampen activity with the UK currency held in relatively tight ranges.

Global risk appetite held firm which helped limit the potential for selling pressure on the Sterling and the currency maintained a firm underlying tone.

GBP/USD attempted to hold above 1.3900 while GBP/EUR rallied to near 1.1590. Markets expect that the Bank of England will hold interest rates at 0.1% and could announce a tapering of bond purchases while growth projections are likely to be upgraded, but caution is also likely to be a feature.

Economic Calendar

Expected Previous
07:00 German Factory Orders (M/M)(MAR) 1.70% 1.20%
09:00 ECB Economic Bulletin
09:30 GBP PMI Services(MAY) 60.1
10:00 Euro - Zone Retail Sales (Y/Y)(MAR) -5.40% -2.90%
10:00 Euro - Zone Retail Sales (M/M)(MAR) 3.00%
10:00 RBA Assist Gov Debelle Speaks
12:00 BOE MPC Vote Cut(MAY 01) 0
12:00 BOE MPC Vote Unchanged(MAY) 9
12:00 BoE QE Purchase Target(M/M)(MAY) 875B
12:00 BoE Rate Decision(M/M)(MAY) 0.10%
12:15 European Central Bank President Lagarde Speaks
13:30 Nonfarm Productivity (Q/Q) -2.80% -4.20%
13:30 USD Initial Jobless Claims 540K 553K
13:30 USD Continuing Jobless Claims 3620K 3660K
14:00 FOMC member John C. Williams speech
18:00 FOMC Member Raphael Bostic speech
18:00 FOMC Member Mester Speaks

*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.