The euro is back trading above last week’s lows against the dollar, which were brought about by inflation fears that briefly sent the US dollar higher after the CPI release. However, EURUSD sits marginally lower this morning as headlines around China and the UN weigh on market sentiment.

 

The UN Security Council held its first open meeting on the Israel-Palestine crisis after local health officials reported the deadliest attack of the current hostilities since the start of the raging conflict. Still, the council took no action. Headlines around the eurozone meanwhile remain sparse, with the accelerating vaccination campaign continuing to be the broader currency driver as the continent has been accelerating its roll-out, reaching over 20% of its population with at least one dose.

 

Meanwhile, infections have pushed sharply lower while many eurozone countries have been easing lockdown restrictions in the past month. The fact that there has not been a bounceback in cases bodes well for further lockdown easing and European growth.

 

Last week’s FX price action was all about inflation after poor US Nonfarm payrolls combined with apparent wage growth started a debate around wage growth pressures despite an elevated unemployment rate, as supply constraints seem to be leading to a reduced level of slack in the US labour market. This compounded concerns that inflationary pressures would be greater than initially expected, and last week’s CPI further confirmed that as they showed inflation exceeded already elevated expectations.

 

While this further stoked inflation expectations, it did not spill over into real yields as the Fed’s reaction function anchors market expectations around a rate hike. For the US dollar, this meant that the initial strength seen after the CPI release almost immediately faded, which had EURUSD trading back towards the middle of last week’s range again.

 

This morning, the US dollar is trading in the green against most G10 currencies as a deterioration in risk sentiment took a modest toll at currency markets, with JPY being the only currency holding strong against the dollar. This deterioration was largely due to Chinese economic data undershooting market expectations. With markets sensitive to how exceptional the US economic performance is this year relative to peers, the data from China filtered nicely into a bout of USD strength. 

Sterling is sitting near the top of the G10 board this morning as the next phase of the economic reopening in England is buoying market sentiment around UK assets. Generally, the dollar is firming against G10 counterparts as slower growth conditions in China weighs on market sentiment.

 

However, sitting roughly flat against the dollar, sterling is only underperforming JPY which is also higher on the downturn in risk appetite. Data over the weekend highlighted similar concerns in the UK to those seen in the US, with labour market shortages in hospitality and retails work appearing. Online job adverts for catering and hospitality roles are running above pre-pandemic levels for the first time since the start of the crisis, having almost trebled since the stay at home order lifted at the end of March according to job engine Adzuna.

 

A similar dynamic has been apparent in the US too, leading to major institutions lifting minimum wages for lower-income positions in order to fill staff shortages. This only adds to the underlying inflation pressures which have started to arise and cause volatility in markets.