EUR / USD
The dollar initially remained under pressure on Wednesday following dovish comments from Fed Chair Yellen on Tuesday with the currency undermined by deteriorating expectations of higher interest rates and the Euro pushed to highs near 1.1340. German consumer inflation data was stronger than expected with an annual increase of 0.3% from 0.0% previously which should lessen deflation fears and a higher Euro-zone reading on Thursday would dampen expectations of further ECB easing. US ADP employment data was slightly stronger than expected with an estimated gain of 200,000 for private-sector payrolls for March compared with an expected 195,000, although February’s gain was revised down to 205,000 from 214,000. The data maintained underlying confidence in the labour market ahead Friday’s crucial employment report with some evidence of upward pressure on wages and this will be a key element in the payrolls data. There was relatively dovish commentary from Chicago Fed President Evans as he backed only very shallow rate increases given concerns surrounding potential economic shocks and downward pressure on inflation. He suggested April was too soon for a rate increase, but would potentially back a move in June if the labour market continues to improve. The Euro edged to lows near 1.1300, but wider selling pressure on the US currency quickly helped push the Euro higher again with seven-week highs around 1.1365 before a retracement. Barring a late recovery, the US currency is set for the sharpest quarterly decline for five years with strong gains for emergingmarket currencies adding to underlying selling pressure although it did edge stronger on Thursday.
The dollar was able to find support on approach to the 112.00 area on Wednesday without being able to hold above the 112.50 level. The US currency was undermined by the decline in US yields with 10-year yields dipping to 1-month lows close to 1.80% before some recovery later in the day with dovish Fed rhetoric remaining an important negative influence. The latest capital-account data recorded a slowdown in investment flows into overseas bonds and a reduction in the pace of Japanese equity sales by overseas investors. There were still substantial net weekly outflows as been the case throughout 2016 and this will be a negative yen influence even with currency hedging. The dollar rallied sharply into the last fix of the Japanese fiscal year with USD/JPY rallying to the 112.70 area, but there was a quick reversal and overall year-end flows were negative for the US currency as it dipped back towards 112.20.
Sterling was unable to break above 1.4450 against the dollar on Wednesday and moved back to test support below the 1.4400 level as the UK currency under-performed globally and subjected to net selling against the Euro, gradually weakening to the 0.7885 area. There was some evidence of month-end selling on the UK currency and there were also underlying concerns surrounding the Brexit risks. The latest consumer confidence reading was unchanged at 0 for the latest month and Sterling drifted lower on Thursday, again under the influence of month-end pressures. The latest UK GDP and current account data will be watched closely on Thursday and any sharp widening in the deficit would reinforce fears surrounding the structural outlook and tend to put underlying selling pressure on Sterling. The latest PMI surveys starting on Friday will also have an important impact on overall confidence.
The Euro made headway against the franc on Wednesday gaining to the 1.0940 area as Euro strength against most pairs was compounded by reduced demand for defensive assets such as gold and the Swiss franc. The dollar did find support just below 0.9600 and rallied back to 0.9650 as the Swiss currency lost traction. The KOF business confidence index edged marginally to 102.5 for March from a revised 102.6 which suggests little underlying change in conditions and modest underlying growth. There are unlikely to be significant SNB policy implications.