EUR/USD briefly slid below parity on Wednesday in the wake of surprisingly strong U.S. inflation data, but short sellers prepared to go home disappointed after the highly anticipated move beneath $1.00 failed to spark follow through and investors worried the report could push the Fed into a policy error.
EUR/USD printed a 0.9998 low on EBS after the CPI data nL1N2YU10J initially sent Treasury yields sharply higher, but the lack of a clear breakdown triggered short-covering and speculation as to who might still be defending parity.
Treasury yields then surrendered their initial post-CPI peaks, sending two-year bund-Treasury yields up about 5bp and weakening the dollar on fears that the aggressive Fed rate hikes projected by the markets would subdue economic growth along with inflation, resulting in monetary easing after December.
Highlighting the risks and weighing further on short-term interest rates, the Fed's Beige Book account of economic conditions said the outlook for future economic growth was mostly negative, with contacts noting expectations of further weakening of demand in six to 12 months.
Still, markets are discounting roughly an even chance of the Fed raising rates by 100bp this month and favoring a 75bp September hike, after June's 75bp rise.
The BOC's 100bp rate hike nBCLDIEI21 -- following 50bp rate hikes by the RBNZ nL1N2YU04I and BoK nL1N2YT03N -- lent credence to the aggressive Fed expectations.
The ECB is expected to deliver its inaugural 25bp hike at its July 21 meeting, with current rates of -0.5% seen rising to a peak of 1.20-30% next year, while markets have factored in a terminal Fed rate near 3.6% as soon as December.
Whether that lingering rates spread is enticing enough to keep EUR/USD retreating toward its next support near 0.9600 may hinge on natural gas supplies to Western Europe from Russia resuming after planned maintenance to Nord Stream 1 ends on July 21 nL1N2YU19O.
EUR/USD was up 0.37%, but still well below this week's 1.0183 high and still in a downtrend lower nL1N2YU1C7.
USD/JPY was up 0.21% after backing off a minor new 24-year peak at 137.875 on EBS.
It faces resistance at 138.00/50/62, with support from the 10-day moving average and Monday's low by 136.20/00.
Even with the markets eyeing a potential risk that the Fed could hike by 100bp this month, 2-year Treasury-JGB yield spreads remain 30bp lower than their June 14 peak.
Thus, the slower rise in USD/JPY since the 135.60 June 15 high nL1N2YU1KQ.
Sterling gained 0.25% after the dollar's post-CPI rally imploded.
The pound was also helped somewhat by an unexpected rise in May UK GDP nL1N2YU0FF and BoE governor Andrew Bailey's attempts this week to bolster waning rate hike expectations nIfp7BH8Rl, but large, rapid-fire rate hikes from other central banks make sterling rebounds appear perishable nL1N2YU1CD.
Aussie, Canadian and New Zealand dollars were up 0.3%, 0.45% and 0.14%, respectively.
Bitcoin and ether gained 2.5% and 5%, respectively.
Thursday features U.S. PPI and jobless claims ahead of Friday's retail sales, July Empire manufacturing, industrial production and Michigan sentiment.
For more click on FXBUZ