US PPI inflation data was higher than expected which revived unease over underlying inflation trends.

US PPI inflation data was higher than expected which revived unease over underlying inflation trends. Risk appetite was slightly more fragile following the inflation data with global coronavirus reservations also significant. US bond yields moved higher with a weak 30-year auction.

Wall Street equities were resilient amid underlying optimism over earnings. Chinese equities moved lower on domestic coronavirus and regulatory concerns.

The dollar regained some ground after the inflation data, although narrow ranges prevailed. EUR/USD was blocked near 1.1750 and settled little changed. Sterling gradually lost ground during the day amid concerns that the UK recovery would slow. Commodity currencies retreated slightly on US currency support.

Euro-zone industrial production declined 0.3% for June after a 1.1% dip the previous month with a 9.7% annual increase which had little impact. EUR/USD was unable to break above the 1.1750 level ahead of the New York open and drifted lower as the dollar resisted further selling pressure and commodity currencies edged lower.

US producer prices increased 1.0% for July, above consensus forecasts of 0.6% with the year-on-year increase at 7.8% from 7.3% previously and the highest annual rate for over 10 years. Core prices also increased 1.0% on the month, double market expectations, with the annual rate at 6.2% from 5.6% previously.

After a slightly weaker than expected CPI release on Wednesday, the data triggered an element of fresh concern over underlying inflation developments which also led to a slightly more defensive market tone with less confident risk conditions.

Initial jobless claims declined to 375,000 in the latest week from a revised 387,000 the previous week and in line with market expectations. Continuing claims also declined to 2.87mn from 2.98mn the previous week. The claims data did little to shift underlying expectations surrounding a firm labour market.

The dollar edged higher following the US data releases with a retreat for commodity currencies and a lack of underlying Euro backing with EUR/USD stabilising around 1.1730. The number of active coronavirus cases in Germany reached a 2-month high which caused from reservations over the outlook, but narrow ranges prevailed with the dollar little changed on Friday and EUR/USD held around 1.1735 as markets continued to monitor global risk conditions.

US Treasuries edged lower following the US producer prices data with the 10-year yield back above 1.35% while equity markets registered net losses, but with little overall change. The dollar was unable to make any headway despite slightly higher yields with a solid yen tone on the crosses.

There was a relatively weak 30-year bond auction which nudged longer-term yields higher with USD/JPY settling just below 110.50.

Narrow ranges prevailed in Asia on Asia with equity markets losing some ground amid underlying reservations surrounding coronavirus trends. There were concerns over further global supply difficulties following the closure of a key Chinese port due to a coronavirus outbreak with the Chinese economy also potentially vulnerable.

Markets will continue to monitor comments from Federal Reserve officials closely with widespread expectations that there will be tapering announcement at the September policy meeting. Fed Chair Powell will also deliver keynote comments at the Jackson Hole symposium in the last week of August.

Confidence in the Japanese economy remained fragile with the Tokyo Governor stating that the city faced a disaster-level problem.

USD/JPY consolidated around 110.40 in early Europe on Friday with EUR/JPY just above 129.50.

Sterling was unable to make any headway following the latest GDP data with the weaker than expected industrial and construction data hampering confidence. There were also concerns that momentum in the economy would slow, lessening the potential for policy tightening by the Bank of England.

The NIESR estimated that GDP increased 1.0% for July with gains of 0.5% in each of the following two months. This would give quarterly growth of 2.4% for the third quarter, half the second-quarter pace. The economy could also be hampered by labour shortages which would put upward pressure on wages.

Overall risk conditions were slightly less constructive during the day and UK equities also lost some ground which curbed Sterling support.

Sterling continued to lose ground after the European close and GBP/USD tested 1.3800. Sterling struggled to regain ground on Friday with further underlying concerns that the UK recovery could stall within the next few months. GBP/USD was just above 1.3800 and GBP/EUR retreated from the key 1.1800 area.

Economic Calendar

Expected Previous
07:30 CHF PPI (M/M)(JUL) 0.30%
07:30 CHF PPI (Y/Y)(JUL) 2.90%
10:00 Euro-Zone Trade Balance(JUN) 7.5B
13:30 USD Import Price Index (M/M)(JUL) 1.00%
13:30 USD Export Price Index (M/M)(JUL) 1.2
15:00 USD Michigan Consumer Sentiment(AUG 01)

*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.