Dollar very much on the front foot

The dollar gained more ground yesterday, benefiting from weakness in equity markets. EURUSD has fallen to a more than 12-month low of $1.1350, while GBPUSD has weakened to under $1.32 again. Both have shed in and around 2.5 cents since last Wednesday’s more hawkish than expected Fed meeting, with a marked firming of interest rate expectations – the market is pricing in about 40bps worth of hikes by the end of this year, some 20bps more than before last week’s meeting – providing solid support for the US currency. EURGBP continues to drift down and is currently testing its year-to-date low of £0.8610.

Equity markets sold off yesterday led by a further decline in technology stocks. The Nasdaq shed more than 2%, following a circa 1% fall on Monday, while European stocks closed more than 1% lower on the day. Bonds also benefited from the weakness in equities. Yields edged lower across the main markets, with UK bonds outperforming (albeit marginally) for a second day running.

Economic activity in the Euro area and the UK remained subdued in June judging by the latest flash PMIs, with the headline index remaining below the key 50 level in both (at 49.5 and 49.4 respectively), amid continued weakness in services sector activity in particular. Both firms’ input costs and selling prices rose further in the two economies this month although the pace of increase eased from May. Economic activity remains notably firmer in the US, with the headline PMI index picking up to 52.2 in June from 51.5 in May.

ECB Chief Economist Philip Lane says “a range of forward-looking signals point to inflationary pressures (in the Euro area) in the coming months,” adding that “in this environment, our focus remains clear: to ensure that inflation stabilizes at our 2% target in the medium term.” Following this month’s 25bps increase in the deposit rate (to 2.25%), the market is almost fully pricing in another 25bps hike by October.

It is another relatively quiet day in terms of economic data with the German ifo business climate index (for June) and US new home sales (May) and the current account balance (Q1) the main releases of note. There’s a smattering of central bank members scheduled to speak during the course of the day.