Central bank meetings and big-hitting economic data releases have dominated the agenda with the US Independence Day holiday adding to volatility. The dollar has been the clear winner against all major currencies over the past 36 hours.
The Euro remained under pressure following Thursday’s ECB meeting. Bank President Draghi was generally very cautious over the economic outlook and reinforced the fact that the ECB was technically prepared for negative deposit rates if required. Draghi also commented that there had been an extensive discussion on whether the refinance rate should be cut with an eventual unanimous vote to leave rates on hold.
There was a significant policy shift as the ECB strengthened its forward guidance substantially from recent meetings. In this context, Draghi with the approval of the ECB board, stated that interest rates would be held at current levels or lower for an extended period of time. This explicit guidance had an important impact in weakening the Euro as EUR/USD dipped to five-week lows below 1.29.
Sterling remained under pressure following Thursday’s Bank of England meeting. The first MPC meeting chaired by new Governor Carney again left interest rates and the amount of quantitative easing unchanged. Unusually, the bank issued a statement even though there were no policy changes at the meeting. The economic recovery was described as fragile and historically weak while there were concerns over rising bond yields. The key section was a forceful statement that expectations of rising interest rates were incorrect. Sterling weakened very sharply following the statement with GBP/USD lows below 1.5050.
Both Sterling and the Euro remain fragile in European trading on Friday with GBP/USD dipping to below 1.50 despite caution and position adjustment ahead of the pivotal US employment report.
The headline US payroll data was stronger than expected with a non-farm employment rising 195,000 for June, unchanged from an upwardly-revised May total while April’s gain was also revised higher to 200,000. The underlying data was broadly in line with expectations and the net impact was to strengthen confidence in Fed tapering of bond purchases during the third quarter. US bond yields surged higher and EUR/USD dropped to fresh five-week lows near 1.28 before finding some respite.
Rising yields and some further stabilisation in Chinese money markets dampened immediate demand for the Japanese yen and USD/JPY maintained a firmer tone. The US employment data triggered a further improvement in yield support and USD/JPY spiked to July highs above 101 before drifting slightly lower.
There was no Sterling relief on Friday as spill-over selling pushed the GBP/USD to test March lows near 1.4850 before a very tentative recovery as EUR/GBP held above 0.86.