FX Update: Sterling on the defensive. US yields frozen.

FX Trading focus:

• Sterling sold off on Bank of England rhetoric yesterday
• USD tries to extend rally, but choppy as US treasuries offer no clues or coincident indications
• Eurozone and US inflation numbers in focus tomorrow.

Sterling suffered a chunky sell-off on a couple of comments from Bank of England speakers at the ECB forum in Sintra, Portugal yesterday. Even as he bemoaned the causes for the Bank of England under-estimating the inflation risks in its prior forecasts, Chief Economist Huw Pill noted that he was seeing signs of transmission of BoE policy into private rents. The comment suggests that as long as tightening is seen as having some effect, the Bank of England may soft-pedal its approach, particularly when Governor Bailey later chimed in that he expects headline inflation will fall back sharply by the end of this year. There were other comments on second round effects and Bailey questioned market assumptions that a peak would so soon lead to cutting. These sounded none to dovish, and yet UK rates corrected quite sharply at the front-end of the UK yield curve, taking sterling south as well. EURGBP rose above 0.8640 at one point and GBPUSD dropped well through the sub-1.2700 supports to trade closer to 1.2600 at one point before rebounding.

The US dollar was also firm, broadly speaking, but this was not down to any input from data or US treasury yields, which remain remarkably frozen within tight ranges all along the curve. As we discussed in today’s podcast and recently in this column (as of this writing, we have been unable to upload it due to a technical issue with our host – go to https://saxostrats.podbean.com to see if we finally succeeded), to inject some more volatility into this market we need to either see a strong tilt to the worse in the outlook that sparks volatility from a risk sentiment angle or enough ongoing strength in the data to spark a break higher in long term yields – something that would take the US 10-year yield benchmark, for example, north of 4.0% again.

Chart: EURUSD
While Bank of England speakers at the ECB forum in Sintra, Portugal managed to move the UK rates needle, the ECB’s Lagarde and Fed Chair Powell failed to do likewise for EU or US rates, clearly an indication that the two central banks there are in data watching mode. EURUSD has chopped around sufficiently to mislead both bears and bulls over the last couple of session, arguing for patience and further signals from a confluence of factors (new incoming data, something that sparks volatility in US long yields, etc. as noted above). Until then, the key levels are fairly well etched now, with 1.1000 on a daily close a minimum hurdle for favouring a possible renewal of the uptrend that has stalled since early May and a close below 1.0850 and perhaps even 1.0800 to point lower for a test of the 1.0635 pivot low. The next best chance for incoming data to dislodge EURUSD from this limbo area are the weekly US jobless claims up today and then the flash June Eurozone core inflation data tomorrow, with the US also reporting May PCE Inflation data.