Markets still expecting a very hawkish Fed.
US producer prices increased 0.8% for June, in line with expectations while the year-on-year rate edged lower to 10.8% from 10.9%. Underlying prices increased 0.5% on the month with a retreat in the annual rate to 8.3% from 8.6%. The data did not have a significant impact in shifting the market narrative.
Following reported guidance within the Wall Street Journal, there were still strong market expectations that the Federal Reserve would hike rates by 75 basis points to 1.75% at Wednesday’s policy meeting with Powell also expected to deliver a hawkish stance given the need to control inflation.
Markets also expect that there will be further upward revisions to the interest-rate projections of interest rates by individual Fed members.
Fed guidance will be a crucial element for all asset classes.
Treasuries attempted to rally early in the New York session, but there was quick selling on rallies and there were steady losses into the European close with the 10-year yield increasing to near 3.45% and the highest level for over 10 years with only a slight correction.
Higher yields and the shift in Fed expectations continued to boost the dollar as yields continued to increase.
The dollar index posted a new 19-year high with a key break above 105.00 on the dollar index despite some resilience in the Euro.
USD/JPY also posted a 23-year high above 135.50 before a limited correction.
Risk appetite remains vulnerable.
Equity markets continued to retreat on Tuesday with further concerns over the impact of global monetary tightening and stagflation.
There was a tentative recovery on Wednesday as US futures ticked higher.
Chinese industrial production increased 0.7% in the year to May after a 2.9% contraction previously and above expectations of a further decline while the decline in retail sales was less severe than expected which provided an element of relief.
The SNP outlined plans for a second Scottish independence referendum which contributed to a further slide in confidence in the UK outlook.
Sterling came under further pressure with GBP/USD sliding to below 1.2000 for the first time since March 2020.
At the European open on Wednesday, the ECB announced that it will hold an ad-hoc council meeting to discuss current market conditions.
There was a rally in peripheral bonds which also supported the Euro.
The German ZEW index was mixed with a slight net improvement and had little net impact.
ECB council member Knot stated that further rate hikes were likely in October and December awhile a 50 basis-point rate hike would be justified in September if current trends continued. The Euro secured net support on the crosses. Higher yields still boosted the dollar across major currencies.
In this context, EUR/USD still dipped to test the 1.0400 area before a slight correction. The ECB announcement of an ad-hoc meeting triggered EUR/USD gains to above 1.0450.
Low domestic yields continued to undermine the yen. USD/JPY secured a decisive break above 135.00 with 23-year highs above 135.50 before a correction to below 135.00.
Higher global yields undermined the Swiss franc. USD/CHF broke above parity and posted 4-week highs around 1.0030 before a limited correction to 1.000. EUR/CHF secured a net gain to 1.0460.
Sterling remained firmly on the defensive as overall UK sentiment remained notably weak. GBP/USD dipped below 1.2000 for the first time since March 2020 and settled just above this level on Wednesday. GBP/EUR dipped below 1.1450.
Commodity currencies again came under heavy selling pressure. AUD/USD dipped to 1-month lows near 0.6850 before a recovery to above 0.6900 after the Chinese data and ECB meeting announcement. USD/CAD strengthened to 1-month highs around 1.2975 before a slight correction.
|07:30||CHF PPI (M/M)(MAY)||1.30%|
|07:30||CHF PPI (Y/Y)(MAY)||6.70%|
|07:45||France CPI (M/M)(MAY)||0.40%|
|10:00||Euro-Zone Industrial Production (Y/Y)(MAY)||-0.80%|
|10:00||Euro-Zone Industrial Production (M/M)(APR)||-2.00%||-1.80%|
|10:00||Euro-Zone Trade Balance(APR)||-16.4B|
|13:15||CAD Housing Starts(MAY)||267.3K|
|13:30||USD Core Retail Sales (M/M)(MAY)||0.40%||0.60%|
|13:30||USD Export Price Index (M/M)(MAY)||0.7||0.6|
|13:30||USD Import Price Index (M/M)(MAY)||0.60%||2.90%|
|13:30||NY Empire State Manufacturing Index(JUN)||17||-11.6|
|13:30||USD Retail Sales (M/M)(MAY)||0.90%||0.90%|
|15:00||USD Business Inventories(MAY)||1.90%||2.00%|
|18:00||USD FOMC Projections of Economy|
|19:00||USD FOMC Statement|
|19:00||FOMC Interest Rate Decision||1.00%|
|19:30||FOMC Press Conference|
|21:00||USD TIC Net Long-Term Transactions(APR)||23.1B|
|23:45||NZD GDP (Q/Q)||3.20%||3.00%|
|23:45||NZD GDP (Y/Y)||3.30%||3.10%|