The dollar posted a marginal fresh 2-month high amid expectations of further short covering.

Risk appetite remained fragile on Wednesday amid reservations over tighter liquidity conditions and global coronavirus trends. US bond yields continued to decline with fresh 4-month lows for the 10-year yield.

Fed minutes tempered more aggressive tightening expectations, but the overall narrative was little changed. Wall Street equities posted record highs, but Asian equities moved lower.

The dollar held firm against European currencies and traded at 12-week highs. EUR/USD traded around 1.1800 with expectations of a dovish ECB stance. Sterling held broadly steady overall, but GBP/USD traded below 1.3800.  There was choppy trading in commodity currencies with net losses amid US currency gains.

The European Commission revised the 2021 GDP growth forecast higher to 4.8% from 4.3% previously with the 2022 estimate at 4.5% from 4.4% previously, although it did warn over uncertainty surrounding the Delta variant. It forecast inflation rates of 1.9% and 1.4% for 2021 and 2022 respectively.

The Euro attempted to stabilise during the European session but was unable to make significant headway.

The latest US JOLTS data recorded an increase in job openings to 9.21mn from 9.19mn the previous month. There was a small decline in the IBD consumer confidence index to 54.3 from 56.4. The dollar secured fresh support towards the European close with a fresh slide in commodity currencies and EUR/USD dipped below 1.1800.

Federal Reserve minutes from the June policy meeting stated that the committee’s standard of substantial further progress was generally seen as not having been met.

Some members considered that they expected requirements for starting to decrease the pace of bond purchases would be satisfied earlier than expected, but there was a lack of consensus whether to slow Treasury buying at the same time as mortgage-backed securities.

The committee highlighted the high degree of uncertainty over the outlook and there were important divisions over inflation.  Although some members warned that there were still negative risks to inflation, a large majority considered that risks to their inflation forecasts were skewed to the upside. Some were also concerned that a prolonged period of higher inflation would increase inflation expectations. The dollar initially ticked lower following the minutes as there were no major new warnings over an early policy tightening, but it regained ground given expectations that the Fed would start to slow the rate of bond purchases this year.

The ECB is due to announce its new inflation target on Thursday with reports suggesting that the bank will endorse a 2% target and tolerate an overshoot of this level.

This would tend to undermine the Euro slightly and EUR/USD traded around 1.1800 and close to 3-month lows as the dollar maintained a strong tone near 12-week highs.

There were further reports that Japan would declare a state of emergency in the Tokyo region which would increase the risk of a ban on all spectators at the Olympics which start later in July. Underlying yen sentient remained fragile, although yield trends limited any potential yen selling.

Chinese government officials were reported as stating that timely use of a cut in reserve ratio requirements will support the economy.

Treasuries continued to rally in early New York with the 10-year yield sliding to near 1.30% which tended to erode US dollar support and USD/JPY hit a low at 110.40 before a limited recovery to 110.60.

There was little change in yields on Thursday and equity futures edged lower while Asian markets moved lower amid reservations over coronavirus developments. USD/JPY initially held close to 110.50 but retreated to 110.25 as the yen remained strong while EUR/JPY traded below 130.20.

Halifax reported that UK house prices declined 0.8% in June with the year-on-year increase slowing to 8.8% from 9.5% previously as tax relief was scaled back.

There was a mixed reaction to the UK government plans to relax coronavirus restrictions in England over the next few weeks. Although there was optimism that there would be improved business conditions, there were reservations over the impact of rising infection rates, especially with an increased risk of disruption from the number of people forced to self-isolate. Global coronavirus developments will also be watched closely in the short term.

Global market conditions remained crucial for overall Sterling direction during the day with a particular focus on the dollar. From highs around 1.3840, there was a sharp GBP/USD retreat to near 1.3750 amid renewed US dollar strength. GBP/EUR also found resistance around 1.1700 with the UK currency undermined by weaker risk conditions.

Economic Calendar