The dollar remained vulnerable as low yields sapped support and touched 11-week lows.

Market conditions were cautious during Monday amid the underlying inflation debate. US bond yields recovered from lows to trade little changed. Wall Street equities pared losses late in the session. Asian equities posted net gains as sentiment held firm.

The dollar remained vulnerable as low yields sapped support and touched 11-week lows. EUR/USD traded above 1.2150 amid optimism over the EU vaccine programme. Sterling secured gains and GBP/USD posted 12-week highs above 1.2180.

Commodity currencies recovered strongly from an intra-day dip as US dollar weakness provided solid support. USD/CAD declined to fresh 6-year lows as commodities posted robust gains.

The Euro held a firm tone in early Europe on Monday with increased overall confidence in the EU vaccination programme which provided net currency support.

The New York Empire manufacturing index edged lower to 24.3 for May from 26.3 the previous month, but slightly above consensus forecasts of 24.0.  The new orders index strengthened at a slightly faster pace on the month with investors also increasing at a faster pace. There was a slight slowdown in the rate of employment growth while prices increased at a faster rate. The prices paid and prices received indices both hit record high for the month and companies expected only a slight moderation in upward pressure on a 6-mpnth view. The data continued to fuel market inflation expectations.

Fed vice-chair Clarida stated that the central bank must be attuned and responsive to incoming results to guarantee that inflation is transitory and that the Fed would act if the data threatens to put inflation expectations higher. He added that the economy is in a very fluid area, maintaining underlying market uncertainty.

The overall rhetoric from Clarida continued to suggest a slight shift with the Fed potentially laying the ground work for a policy shift later this year.

Atlanta Fed President Bostic stated that prices will increase as a function of pent-up demand and that he will be watching to assess how quickly the economy improves.

Dallas head Kaplan maintained a bullish outlook on the US economy and reiterated that the first interest rate hike could take place in 2022.

The dollar overall was unable to gain sustained backing given expectations that real interest rates would remain very negative and dipped again later in New York with EUR/USD settling above 1.2150. Commodity currencies posted further gains on Tuesday and the US dollar remained under pressure with EUR/USD around 1.2170.

After gaining ground ahead of the New York open, Treasuries lost ground with US yields edging higher from lows near 1.60% to 1.63%. USD/JPY did find support above the 109.00 level and consolidated around 109.15 at the European close.

The NAHB housing index was unchanged at 83 on the month with further evidence of strength in interest-rate sensitive areas.

US equities pared losses late in New York, but the dollar was held close to 109.20 amid wider losses and negative underlying sentiment.

Japanese GDP declined 1.3% for the first quarter of 2021 compared with consensus forecasts for a 1.1% decline as consumer and business spending remained under pressure. Foe fiscal 2020/21, there was a GDP decline of 4.6%, the sharpest decline on record. The overall impact was limited with yen support sapped by on-going coronavirus concerns while US equity futures posted gains. Both currencies remained out of favour with USD/JPY settling around 109.20 in early Europe on Tuesday.

Sterling was held in relatively narrow ranges on Monday. The further relaxation of coronavirus restrictions underpinned Sterling sentiment, although there were still reservations over the impact of the Indian variant which could disrupt plans for the easing measures planned in June. Overall risk appetite also held steady with markets continuing to monitor global inflation developments. UK equities found solid support on dips which provided an element of currency support.

Bank of England external MPC member Vlieghe stated that this year’s growth should be considered a return to normalcy rather than a boom. Although bottle necks and base effects would push inflation above target in the short term, he stated that surplus capital may build-up quickly if the economy does not grow rapidly.

Sterling was able to post net gains on Tuesday amid solid risk appetite with no major impact from domestic coronavirus reservations.

UK labour-market data was stronger than expected with unemployment held at 4.8% from 4.9% previously while there was a net decline in the claimant count. Sterling maintained a firm overall tone with GBP/USD posting 12-week highs near 1.4180 while GBP/EUR edged higher to 1.1630.

Economic Calendar