by Darrell Jobman, Editor-in-Chief TraderPlanet.com
The dollar regained ground in Asian trading on Friday and strengthened sharply in Europe to highs near 1.53 ahead of the US open.
US consumer prices rose 0.6% in May compared with expectations of a 0.5% increase with the annual increase the highest sine January as there was a strong rise in transportation prices. There was a rise in core prices of 0.2% to give an annual increase of 2.3%.
There has already been a substantial shift higher in interest rate expectations and the inflation data was not bad enough to trigger a further increase in yields, but the Federal Reserve will remain on high alert over inflation conditions which will underpin the dollar.
The latest University of Michigan consumer confidence index continued to deteriorate with a dip to 56.7 in June from 59.8 the previous month as the current conditions and expectations components continued to weaken. Inflation expectations remained above the 5.0% level in the latest data.
The Euro-zone inflation data will be watched closely on Monday with a particular focus on the core data. ECB officials maintained a consistent stance on Friday with further warnings that there could be a rate increase at the July meeting, although the impact will be limited as it is now priced in.
The Irish referendum result announced that the Lisbon Treaty had been rejected and it will not, therefore, be ratified in its current form. There will be concerns over increased political tensions within the Euro area which will tend to unsettle the currency to some extent. The Euro recovered to 1.5380, but political fears capped the gains.
The Bank of Japan left interest rates on hold at 0.50% following the latest council meeting. Bank Governor Shirakawa took a slightly more hawkish stance on inflation which will provide some degree of yen support, although the impact will be limited as there was no suggestion of an immediate increase in rates.
The G8 meetings will continue to be watched closely over the weekend given speculation that there will be some pressure for stronger Asian currencies against the Euro. If there is a strong push for a firmer US dollar at the meetings, then there will be scope for additional dollar buying.
The yen was holding slightly stronger at 107.75 against the dollar in early Europe on Friday before re-testing the 108.0 level.
The dollar pushed to a high of 108.40 before drifting back to around 108.10 later in New York with the yen still struggling.
Sterling remained under pressure against the dollar during Friday and weakened to lows around 1.9410 before pushing back towards the 1.95 level later in US trading. The UK currency strengthened against the Euro, but there was evidence of selling at levels stronger than 0.7880 which curbed gains.
The inflation data will be watched closely next week and there were hints from the Treasury that it is expecting a letter to be received from the Bank of England which suggests that the rate will be above the 3.0% level.
This should come as no surprise given the recent upward pressure on prices. A very strong inflation reading would, however, increase speculation that the Bank of England could be forced to increase interest rates which could provide some Sterling support with sentiment still undermined by fears over the economy.
The Euro found support on dips towards the 1.6050 level against the franc and pushed to highs near 1.6150 before consolidating. The dollar pushed to a high of 1.0540 against the Swiss currency on wider gains before correcting weaker to 1.0480.
After being hampered by an increase in US yields during European trading, the Swiss currency found some relief as the US inflation data was not significantly worse than expected.
The Reserve Bank Governor took a firm stance on inflation and interest rates in a speech on Friday, although his comments were also global in their outlook which will limit the domestic impact. The Australian dollar rallied, but struggled to hold above the 0.94 level and weakened back to 0.9360 in Europe.
The Australian dollar secured some relief in US trading on Friday as the US currency retreated from its best levels while commodity prices held firm.
There will continue to be some doubts over the Australian economy which will limit buying support and it was still trapped below the 0.94 level.