The dollar remained under pressure with expectations of deeply negative real rates continuing to undermine support.

Relatively narrow ranges prevailed on Tuesday with markets still dissecting inflation trends.

Wall Street stocks edged lower and sentiment gradually deteriorated during the day as cost pressures increased. Asian equity markets also lost ground on Wednesday. US bond yields were little changed and provided little direction ahead of the Fed minutes.

The dollar remained under pressure with expectations of deeply negative real rates continuing to undermine support. EUR/USD posted fresh 12-week highs near 1.2250 Sterling held a firm tone, but with GBP/USD selling above 1.4200 and a slight retreat as equities retreated.

The Canadian dollar retreated from 6-year highs with USD/CAD support near 1.2000. The Australian dollar struggled to make headway and the more defensive risk tone curbed support for commodity currencies.

Cryptocurrencies declined sharply with bitcoin at 3-month lows.

Euro-zone GDP was confirmed at 0.6% for the first quarter of 2021 with a year-on-year decline of 1.8%. The Euro maintained a firm tone ahead of the New York open while the dollar remained firmly on the defensive. EUR/USD pushed quickly above the 1.2200 level for the first time in nearly 3 months and held a strong tone.

ECB council member Villeroy stated that there is no risk of a lasting inflation return in the Euro-zone and that monetary policy should remain accommodative. There were still some expectations that the ECB could taper bond purchases ahead of the Federal Reserve which would support the single currency.

ECB rhetoric will be watched closely given the potential for protests against Euro strength by the central bank if the currency continues to strengthen.

US housing starts declined to an annual rate of 1.57mn for April from 1.73mn the previous month and well below consensus forecasts of 1.71mn with some evidence of higher lumber costs undermining activity. Building permits were little changed at 1.76mn for the month and marginally below market expectations.

The dollar overall was unable to make any headway and EUR/USD posted net gains to fresh 12-week highs around 1.2225.

Ratings agency Moody’s expressed optimism that the EU recovery fund would support Southern Europe which helped underpin underlying Euro confidence. Underlying dollar confidence remained notably fragile on Wednesday, although there was a tentative recovery against commodity currencies as equity markets moved lower.

The Euro maintained a robust tone and edged higher to around 1.2240 in early Europe despite the more cautious tone surrounding risk appetite.

US Treasuries were held in relatively narrow ranges on Monday with the 10-year yield trading above the 1.60% level. The US dollar was unable to make significant headway amid wider pressure and USD/JPY dipped below the 109.00 level.

US equities dipped lower later in the session and the dollar was unable to regain territory as risk appetite was less confident.

Minutes from May’s Federal Reserve policy meeting will be released later in the day and markets will parse the rhetoric very closely with a particular focus on inflation comments and the underlying debate surrounding any potential timetable for tapering bond purchases. More hawkish rhetoric within the minutes could provide an element of dollar support with the equity market reaction watched closely. Overall market volatility is liable to increase as the inflation debate intensifies.

Bank of Japan Governor Kuroda stated that the economy remains under pressure from states of emergency and there were reports that the emergency measures would not be lifted at the end of this month. Overall, USD/JPY settled just below the 109.00 level in early Europe with EUR/JPY around 133.25.

Reaction to the UK labour-market release was muted, although there was a net positive impact given that the data overall indicated labour-market resilience.

The latest institutional survey suggested that the global allocation to UK equities hit the highest level since 2014 which suggested strong underlying demand for UK assets. GBP/USD pushed above the 1.4200 level against the weak dollar, but EUR/GBP found support below 1.1600.

There were still some reservations over domestic coronavirus developments and the risk that the planned removal of social restrictions in June could be delayed. At this stage, markets still expected that the economic recovery would continue, but evidence of much higher transmission rates could have serious implications.

Bank of England Governor Bailey stated that the UK was nowhere near any talk of whether to use negative interest rates. As far as inflation is concerned, Bailey stated that much of the current increase was due to energy and it expects that this will be temporary.

GBP/USD traded just below 1.4200 at the New York close with GBP/EUR just above 1.1600. The headline UK CPI inflation rate increased to 1.5% for April from 0.7% previously and in line with expectations while the core rate increased to 1.3% from 1.1%.

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