Overall confidence surrounding the UK economic recovery remained firm during Thursday.

Markets were less volatile during Thursday as traders continued to monitor inflation risks and policy implications.

There was no further significant alarm from higher-than-expected US producer prices data. Overall risk conditions were more stable during the day despite underlying uncertainty. Wall Street equities recovered to post gains with a more confident mood in Asia.

The dollar was unable to secure a further significant recovery with the dollar index overall posting a slight decline. EUR/USD posted net gains to just below 1.2100 on Friday. Sterling drifted lower in tight ranges with GBP/USD around 1.4050. Commodity currencies were mixed with the Canadian dollar losing ground as the Bank of Canada warned over currency strength.

Some European markets were closed on Thursday which dampened activity to some extent ahead of the New York open. Markets were also continuing to digest the US CPI inflation data released on Wednesday with a further discussion of central bank and market implications. EUR/USD found support close to 1.2050 as the US currency was unable to hold its best levels. There were still expectations that the Fed would maintain a supportive monetary policy in the short term.

US producer prices increased 0.6% for April, above consensus forecasts of a 0.3% increase with a year-on-year increase of 6.2% from 4.2% previously. Underlying prices increased 0.7% on the month with a year-on-year increase of 4.1% from 3.1%.

The higher than expected wholesale inflation rate maintained underlying inflation concerns in the markets. There was, however, a composed market reaction to the data.

Initial jobless claims declined to a fresh 13-month low of 473,000 for the latest week from 507,000 previously and below consensus forecasts of 490,000. Continuing claims also declined slightly to 3.66mn from 3.70mn the previous week.

There was a measured impact from the data with the dollar overall able to recover some territory, but unable to gain significant traction. EUR/USD only briefly moved above the 1.2100 level and retreated to around 1.2070 towards the European close.

Overall market conditions were more subdued as markets debated US and global inflation dynamics. The latest data indicated that coronavirus developments in Germany are gradually improving which provided an element of relief and EUR/USD edged higher to around 1.2090 in early Europe on Friday. The latest US retail sales data is due later in the day with expectations of a modest monthly increase following the surge in sales seen for March.

US Treasuries rallied at the New York open despite the higher-than-expected producer prices data with a limited retreat in yields. The dollar edged lower, although the impact was offset by slightly lower yen demand as Wall Street equities posted a significant recovery.

Richmond Fed President Barkin stated that strong demand would continue throughout 2021 and 2022, but markets were more concerned over rhetoric surrounding inflation. St Louis Fed President Bullard stated that it was a judgement call on whether inflation is transitory. This was a slight potential shift in stance as it opens up the possibility that inflation is not transitory. As US bond yielded edges lower, USD/JPY drifted weaker to below 109.50 amid a slightly firmer yen. In this context, comments from Dallas Head Kaplan will be watched closely on Friday.

There were further reservations over Japanese coronavirus developments with the authorities set to declare a state of emergency in a further three prefectures.

US equity futures moved higher in Asia and USD/JPY consolidated around 109.50 in early Europe with EUR/JPY around 132.40.

Overall confidence surrounding the UK economic recovery remained firm during Thursday. There were, however, some reservations over the Indian coronavirus variant which has taken hold within the UK. Scientific advisers held a meeting during the day and there were some concerns that the UK re-opening plans could come under threat. In this context, there were some concerns over the risk of local lockdowns which would undermine the recovery potential.

There were also expectations that the overall Euro-zone performance would improve which would provide Euro support over the medium term and limit the UK relative advantage. Risk conditions stabilised during the day, although there was still wariness over underlying conditions and threat of renewed volatility.

GBP/USD did find support on approach to the 1.4000 area, but was unable to regain momentum and settled below 1.4050 while GBP/EUR settled close to the 1.1620 level as narrow ranges prevailed during the day. Sterling was held in narrow ranges on Friday as GBP/USD traded close to 1.4050.

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