The dollar continued to post strong gains with an advance to fresh 2-month highs.

Risk appetite was more cautious on Thursday as the Fed rate projections and statement continued to be digested. US bond yields edged lower which limited the scope for more substantial damage to risk assets. Wall Street equities held in tight ranges with marginal losses and Asian markets were notably mixed.

The dollar continued to post strong gains with an advance to fresh 2-month highs. EUR/USD also dipped to 2-month lows just below 1.1900. GBP/USD slid to 1-month lows below 1.3900, but Sterling overall held a solid tone. Commodity currencies were dominated by US dollar strength. AUD/USD retreated sharply to 2021 lows before a marginal recovery.

The Euro continued to lose ground ahead of Thursday’s New York open, primarily under the influence of a stronger US dollar. There was also further evidence of position adjustment with a closing of long Euro positions and scaling back of dollar shorts amid a shift in US interest rate expectations.

US initial jobless claims increased to 412,000 in the latest week from a revised 375,000 previously and above consensus forecasts of 360,000 while continuing claims were unchanged at 3.52mn. Overall confidence in the labour market remained firm following the data.

The Philadelphia Fed manufacturing index declined slightly to 30.7 from 31.5 previously and marginally below expectations of 31.0. There were further solid increases for new orders, shipments and unfilled orders while manufactures were more confident over the six-month outlook.

Employment increased at a faster rate on the month and there was further strong upward pressure on costs. The prices paid index recorded the strongest reading since mid-1979 while the prices received component strengthened to the highest level since October 1980. The pricing data maintained expectations that underlying pressures were still increasing and higher inflation may not be transitory.

The dollar strengthened to 2-month highs after the data with further speculation that higher inflation could lead to an earlier than expected policy tightening by the Federal Reserve. Commodity currencies continued to lose ground and EUR/USD dipped to 2-month lows below 1.1900 before securing a slight recovery.

Markets will be on high alert for any comments from Federal Reserve speakers in the short term with EUR/USD held close to 1.1900 in early Europe on Friday.

Following a sharp move higher following Wednesday’s Federal Reserve policy statement, there was no extension of selling in Treasuries with the 10-year yield retreating to around 1.53% after the Wall Street open which curbed any further dollar buying against the Japanese currency.

After posting highs above 110.80, USD/JPY retreated to lows just below 110.35 as yields moved lower once again with the 10-year yield briefly dipping below the 1.50% level. The yen also gained significant support on the crosses with EUR/JPY sliding to lows below 131.0.

The Bank of Japan policy decisions were in line with markets expectations as interest rates were held at -0.1% and the central bank will continue to aim for a 10-year yield around 0.0%. The pandemic release programme was also extended until the end of September. The bank noted that the economy overall is recovering, but revised down the assessment on consumption. There was a muted market initial response, although USD/JPY dipped further to test 110.00 as the yen held a firm tone on the crosses.

Sterling was supported to some extent by further speculation that the Bank of England could shift to a slightly more hawkish policy stance. This was an important element given that the latest policy statement is due next week. Chief economist Haldane stated that the economy may be near pre-pandemic output levels, although there was little impact given his consistently hawkish views over the past few weeks. Further comments should be limited ahead of next week’s policy decision.

There was some unease over coronavirus developments with the UK infection rates now higher than the Euro-zone once again, although there were some reports that the easing of restrictions in England could be brought forward to July 5th if hospitalisation rates remain very low.

GBP/USD retreated to fresh 1-month lows just below 1.3900 as US dollar strength dominated.

UK retail sales declined 1.4% for May as food sales declined sharply on a hospitality re-opening. GBP/USD traded just below 1.3900 against the strong dollar following the weaker than expected data with GBP/EUR around 1.1680.

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