UK retail sales defy expectations.

ECB policy remained an important focus with reports that most policymakers are prepared to back at least two 25 basis-point rate increases this year.

Minutes from the April policy meeting reported that there was widespread concern over high inflation number and some members viewed it as important to act on policy without undue delay.

There are now very strong expectations that the ECB will act to raise rates at the July meeting, but still important scepticism whether the bank will be able to secure support for a series of rate hikes, especially given growth risks.

The Philadelphia Fed manufacturing index declined sharply to 2.6 for May from 17.6 previously and below consensus forecasts of 16.0. There were, however, strongly monthly readings for new and unfilled orders as well as shipments. Employment indicators were mixed with strong employment growth, but a dip in weekly hours.

Cost pressures remained strong, but there was a slight easing of inflation readings. Companies were less optimistic over the outlook and expect a slight easing of inflation pressures.

The Chinese central bank held the 1-year lending rate at 3.70% while the 5-year rate was cut to 4.45% from 4.60%. The 5-year rate is mainly used for mortgage rates and maintained expectations of further support measures for real estate and the economy.

Risk appetite was notably fragile in early Europe on Thursday, but sentiment gradually recovered ground with slightly increased optimism that very aggressive Fed rate hikes could be avoided. The cut in Chinese rates also helped underpin confidence.

The dollar lost further ground on Thursday with a significant debate over the US outlook. There has been further evidence of weaker retail sales, but uncertainty whether this is a symptom of a weaker economy or illustrates a switch in spending towards services and leisure. The Philly Fed data contributed to the underlying debate.

The debate over US exceptionalism was significant in leading to a dollar correction.

UK consumer confidence dipped to equal a record low for May. The latest retail sales data, however, was stronger than expected with a 1.4% increase for April compared with expectations of a small monthly decline with the annual slide held to 4.9%. The sales data jolted the very pessimistic narrative, at least for the very short term.

Markets remained convinced that the ECB would hike rates by 25 basis points at the July policy meeting. The Euro also benefited from fresh short covering. The dollar was undermined by stabilisation in risk appetite and an element of doubt over the US outlook. EUR/USD posted net gains to near 1.0600 before settling around 1.0575.

Lower longer-term bond yields also sapped dollar support. Japan’s core inflation increased to a 7-year high of 2.5%. USD/JPY slumped to lows just above 127.00 before a recovery to 127.90.

The Swiss franc posted further net gains on speculation over a more hawkish National Bank policy over the medium term. EUR/CHF dipped to lows below 1.0250 and a recovery faded quickly USD/CHF posted sharp losses to 0.9700 and unable to secure a recovery.

Sterling was able to benefit from short covering and political risks were also seen as easing slightly. GBP/USD surged to just above 1.2500 before fading and held a firm tone on Friday. GBP/EUR held around 1.1770.

After a fresh setback, commodity currencies rallied strongly on hopes that the Chinese coronavirus situation was improving. The Chinese rate cut also boosted confidence on Friday.

AUD/USD posted net gains to 0.7060 before a correction to 0.7040 on Friday. USD/CAD tested support below 1.2800 and traded close to this level on Friday.

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