EUR/USD settled just below 1.2200 ahead of next week’s Fed meeting.

The ECB made no policy changes at the council meeting. US jobless claims data and CPI data were both stronger than expected. US Treasury yields failed to increase despite strong data amid expectations of a dovish Fed policy. Wall Street equities secured net gains with the S&P 500 index at a record high. Global equities were more cautious with little net change.

The dollar failed to hold fleeting gains after the data and posted net losses amid a lack of yield support. EUR/USD settled just below 1.2200 ahead of next week’s Fed meeting. Sterling recovered from intra-day lows with GBP/USD advancing to near 1.4200. Commodity currencies edged higher as the dollar retreated, but ranges were contained.

The dollar edged higher ahead of Thursday’s New York open with amid position adjustment. The ECB held interest rates at 0.0% following the latest policy meeting and there were no changes to the asset-purchase programme. The bank upgraded its GDP growth forecasts for 2021 and 2022 with next year’s projection increased to 4.7% from 4.1% seen in March. The 2021 inflation forecast was revised to 1.9% from 1.5% with the 2022 forecast projected at 1.5% from 1.2%.

According to President Lagarde, inflation will rise further in the short term due to base effects, temporary factors and the increase in energy prices. She added that it was important to trends in the services sector and underlying inflation is still subdued. Lagarde also noted that any premature tightening poses a threat to growth and inflation. The near-term risks were described as balanced while the council is a little bit more upbeat over the outlook than three months before.

Lagarde also stated that it was too early to talk of tapering bond purchases and, although there was choppy trading the rhetoric overall was close to market expectations with only a brief dip lower in EUR/USD.

US consumer prices increased 0.6% for May, above consensus forecasts of 0.4% with the year-on-year rate increasing to 5.0% from 4.2%. This was also above expectations of 4.7% and the highest reading since September 2008. There was a further strong increase in used vehicle prices for the month with a further strong increase in transport services prices. Core prices increased 0.7% on the month compared with expectations of a 0.4% increase while the annual rate increased to 3.8% from 3.0%. This was above expectations of 3.4% and the highest rate since May 1992 which maintained concerns that the increase is more than just transitory.

The dollar briefly strengthened on the data, but gains reversed quickly as yields failed to respond. There were also expectations that the dollar would remain vulnerable if there was no response from the Federal Reserve at next week’s policy meeting. There was choppy trading with little underlying conviction as EUR/USD consolidated around 1.2170. The US dollar remained on the defensive on Friday as yields remained low with EUR/USD edging higher to 1.2190.

Chinese new loans increased CNY1500bn for May after a CNY1470bn increase the previous month and slightly above consensus forecasts, although total social financing was slightly below market expectations and there were still some reservations that the Chinese credit cycle was peaking.

US initial jobless claims declined to a fresh 14-month low of 376,000 in the latest week from a revised 405,000 previously, although this was slightly above consensus forecasts. Continuing claims declined to 3.50mn form 3.76mn, reinforcing confidence in the labour market.  US bond yields edged higher following the jobless claims and inflation data, but there was a quick reversal with the 10-year yield back below 1.50% which dampened potential US currency support.

Overall, USD/JPY failed to hold highs near 109.80 and retreated to below 109.50. There was report that a bipartisan group of US Senators had reached agreement on the infrastructure plan, but bond yields continued to decline, and the dollar remained on the defensive.

Confidence in the Japanese economy and yen remained weak, but USD/JPY was unable to make headway as it traded around the 109.40 area.

Sterling dipped lower in early Europe on Thursday with a GBP/USD break to 1-month lows below 1.4100 triggering further selling. There were further reservations surrounding the Delta variant developments within the UK with doubts that restrictions in England would be lifted as well as unease over trade friction with the EU.

The UK currency gained some protection from solid risk conditions. After finding support below 1.4100, there were GBP/USD gains to around 1.4170 while GBP/EUR traded just above 1.1640. Sterling was also supported by expectations that the Federal Reserve and ECB would maintain loose policies over the medium term.

UK GDP increased 2.3% for April, in line with expectations, but the industrial production data was weaker than expected for the month and construction activity also declined.

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