US recap: EUR/USD down on euro zone-US data divergence

June 28 (Reuters) – The dollar index rose 0.4% on Wednesday as signs of economic weakness in the eurozone and elsewhere contrasted with a trend of generally positive US data surprises recently.

Data on Wednesday showed euro zone bank lending took another hit and Italy’s June inflation retreated slightly faster than forecast.

This followed a report showing Australian inflation hit a 13-month low while China reported tumbling industrial profits, raising questions about whether government stimulus will be enough to boost the world’s second-largest economy and commodity currencies.

All of this contrasted with US data on Tuesday showing above-forecast consumer confidence, capital goods orders, new home sales, and house prices.

There were only fleeting hawkish market responses to ECB, Fed, and BoE chiefs reaffirming their inflation-fighting efforts at the ECB’s conference in Sintra Wednesday.

EUR/USD, after bouncing from its 1.0896 Wednesday lows, lost 0.35%, in line with slightly more negative 2-year bund-Treasury yields spreads. The market continues to price in most of two additional 25bp ECB hikes before a subtle shift toward cuts in 2024.

The Fed, after leaving rates unchanged in June for the first time in 10 meetings, is fully priced to hike 25bp by September, with a slight risk of another in November. But as Chair Jerome Powell reminded markets, the Fed is increasingly data-dependent.

Thursday and Friday feature eurozone and US inflation data, with jobless claims also due.

Sterling, after recovering a bit of its earlier slide to 1.2607 by 50% of June’s sharp advance, fell 0.8%. The BoE’s inflation fight dilemma was put in sharper contrast by a report that one in seven Britons faced hunger in 2022.

USD/JPY came off 144.62 highs on EBS just beyond key resistance at 144.50, but was still up 0.18%. BoJ governor Kazuo Ueda’s defense of ongoing massive stimulus amid aggressive G7 policy tightening rang somewhat hollow. He did at least allow that policy could change if inflation persists in 2024.

The Japanese MoF’s heightened warnings against the yen weakening continue to inject uncertainty into the one-sided USD/JPY rally since June Fed and BoJ meetings.

(Editing by Burton Frierson; Randolph Donney is a Reuters market analyst. The views expressed are his own.)