GBP/EUR rallied to 7week highs around 1.1875 after stronger than expected UK GDP data.

The German ZEW economic sentiment index dipped sharply to -53.8 for July from -28.0 previously and well below expectations of -38.3. The current conditions component also declined sharply to -45.8 from -27.6 and also well below expectations for the month. The Euro-Zone ZEW expectations index also declined sharply to -51.1 from -28.0 previously.

The ZEW President stated that major concerns about energy supply in Germany, ECB plans to raise interest rates and further pandemic-related restrictions in China have led to a considerable deterioration in the outlook. In this context, energy and export related industries are particularly vulnerable.

The US NFIB small-business confidence index retreated to 89.5 for June from 93.1 previously and the lowest reading since January 2013. Overall labour demand remained firm on the month while 34% of business owners reported that inflation was the biggest problem, the highest level since the fourth quarter of 1980.

The IBD consumer confidence index edged higher to 38.5 for July from the 10-year low of 38.1 for June, but below consensus forecasts.

Oil prices came under heavy selling pressure during Tuesday with Brent trading at 3-month lows below $100 p/b.

Lower oil prices fuelled some hopes that inflation pressures had peaked.

Treasuries regained some ground on Monday with the 10-year yield dipping below the 3.00% level. There was a further net retreat to 2.96% on Tuesday.

The US dollar posted further gains on Tuesday and posted a fresh 19-year high as EUR/USD touched parity.

There was a very limited correction later in the day with the dollar index just below 19-year highs.

The latest UK data recorded a 0.5% increase in GDP compared with consensus forecasts of a 0.1% with a stronger than expected reading for the industrial data.

The latest US consumer prices data will be released on Wednesday and will be very important for market expectations surrounding Fed policy. The data will also be a substantial impact across all asset classes.

Consensus expectations are for the headline rate to increase to 8.8% from 8.6% with the core rate retreating to 5.7% from 6.0%.

The Bank of Canada (BoC) will announce its latest interest rate decision on Wednesday with consensus forecasts for a sharp rate increase of 75 basis points to 2.25%.

The BoC will also release its latest Monetary Policy Report with forward guidance scrutinised very closely for hints on rate trends over the next few months.

The Reserve Bank of New Zealand increased interest rates to 2.50% at the latest policy meeting, in line with consensus forecasts.

Underlying confidence in the Euro-Zone economy remained very fragile, especially with further important reservations over the security of gas supplies. EUR/USD tested the 1.0000 level for the first time since 2002, but markets were unable to break below this level.

US economic data maintained some reservations over the outlook. Lower US yields limited scope for further dollar buying. There was also an element of position adjustment ahead of the US CPI data. EUR/USD secured a weak correction to 1.0075 before fading again to 1.0035.

The yen secured some respite as US yields retreated. USD/JPY dipped to lows at 136.50 before fresh buying emerged and settled around 137.00.

The Swiss franc maintained a strong tone on expectations that the National Bank wants a stronger currency. EUR/CHF was held below 0.9900 and USD/CHF failed to hold above 0.9850 and settled around 0.9820.

Sterling was unable to gain any significant support amid an underlying lack of confidence in the outlook. GBP/USD did recover from 2-year lows near 1.1800 to trade around 1.1900. GBP/EUR rallied to 7-highs around 1.1875 after stronger than expected UK GDP data.

Commodity currencies managed to rally as the US currency faded. USD/CAD was hampered by a slide in oil prices and USD/CAD settled just above 1.3000 ahead of the Bank of Canada policy decision. AUD/USD secured a net recovery to 0.6770.  NZD/USD consolidated around 0.6130 after the RBNZ rate hike.

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