Sterling secured further net gains, but GBP/USD hit resistance near 1.4000.

There were no major moves on Wednesday amid mixed rhetoric from Fed officials and further uncertainty over monetary policies US bond yields were little changed with the 10-year yield just below 1.50%. Wall Street equities were held in tight ranges with a fresh record high for the Nasdaq index. Global equities overall were unable to make headway with tight ranges in Asia on Thursday.

After significant losses, the dollar secured a limited recovery later in the day to trade little changed.  EUR/USD was unable to hold above 1.1950 and settled around 1.1930. Sterling secured further net gains, but GBP/USD hit resistance near 1.4000. Commodity currencies were unable to hold best levels as the US dollar recovered.

The French June PMI manufacturing index edged higher to 57.1 according from 57.0 previously, but below consensus forecasts while the services index was also below expectations at 57.4 from 56.6 previously. In contrast, the German PMI manufacturing index strengthened to 64.9 from 64.4 previously and above consensus forecasts while the services-sector index posted a strong advance to 58.1 from 52.8 in May, the strongest reading for over 10 years.

The Euro-zone PMI manufacturing index was unchanged at 63.1 with the services index strengthening to 58.0 from 55.2. The data maintained underlying confidence in the Euro-zone recovery outlook and the Euro maintained a firm tone into the New York open. The US current account deficit widened to $196bn for the first quarter of 2021 from $175bn previously, but below consensus forecasts of $206bn.

Atlanta Fed President Bostic stated that the phase of higher inflation is set to be longer than expected initially. He added that a decision on tapering could be seen in 3-4 months while a rate increase was possible late in 2022. Fed Governor Bowman commented that inflation has risen and is likely to rise further while supply-line bottlenecks could take some time to ease. Nevertheless, she expected that upward pressures on inflation should ease as bottlenecks are resolved.

Dallas Fed President Kaplan reiterated that he expected a first rate increase in 2022. Boston head Rosengren was more confident over transitory inflation although the rate is likely to be slightly higher than 2.0% in 2022. EUR/USD peaked at 1.1970 on Wednesday before a retreat to 1.1930 as the US dollar secured some wider respite on short covering. There was little change on Thursday with EUR/USD around 1.1925 as markets continue to monitor Federal Reserve comments closely.

USD/JPY posted 15-month highs at 111.10 ahead of Wednesday’s New York open before stalling as the US currency came under wider selling pressure.

US new home sales declined to an annual rate of 769,000 for May from a revised 817,000 previously and well below consensus forecasts with a lack of supply hampering transactions. Although there was choppy trading in US Treasuries, overall yields were little changed with the 10-year yield below 1.50%. USD/JPY dipped to lows around 110.70 before consolidating around 111.00 as underlying dollar demand held firm.

Treasury Secretary Yellen commented that inflation will go back to normal after this year. There were also reports that Congressional negotiators were getting close to an infrastructure framework deal, although markets remained cautious with little reaction. Market conditions were subdued in Asia on Friday with underlying yen sentiment still weak with USD/JPY settling around 110.80 in early Europe and EUR/JPY around 132.30.

According to the flash data for June, the UK PMI manufacturing index retreated to 64.2 from 65.6 previously, although slightly above consensus forecasts while the services index retreated to 61.7 from 62.9 and below market expectations. There was a further strong rate of growth in new orders with the strongest rate of job creation in the series history. Within manufacturing, there were further and severe supply-side difficulties with costs and prices both increasing at the fastest pace on record. There was a dip in overall business optimism while prices in the services sector also increased at a record rate for the month.

According to sources, the EU member states have conditionally approved a three-month extension to the grace period for the Northern Ireland protocol.

Sterling overall maintained a firm tone with net gains into the New York open. GBP/USD strengthened to highs just below 1.4000 while GBP/EUR rallied to 10-week highs around 1.1700. There was speculation that the Bank of England would adopt a more hawkish stance at Thursday’s policy meeting amid the potential for increased concerns over inflation, although there was a limited correction late in Europe.

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