EUR / USD
German factory orders recovered 3.2% for December following a revised 4.4% decline the previous month and stronger than consensus forecasts of a 2.0% increase, but the industrial production data was much weaker than expected. The Euro-Zone Sentix business confidence index recovered further to -8.0 for February from -17.5 previously and well above consensus forecasts of -12.9. According to Sentix, the latest increase signals that a recession is off the table for the time being. Instead, the scenario of stagnation is gaining ground. Euro-Zone retail sales declined 2.7% for December with a 2.8% annual decline.
ECB council member Kazaks stated that there will be a further 50 basis-point rate hike barring a significant data shock.
The dollar overall maintained a strong tone following Friday’s much stronger than expected jobs data and weaker equities also underpinned the US currency. The Euro continued to lose ground with a slide to lows around 1.0710 before a tentative correction to 1.0730.
The Euro struggled to make any headway on Tuesday with an important element of caution ahead of comments from Fed Chair Powell later in the day. There will be expectations of a relatively hawkish policy stance after the latest jobs report which will underpin the dollar into his remarks and the Euro overall traded around 1.0730.
US Treasuries posted further losses after the European open and, after a brief pause, there was further selling in early New York with the 10-year yield increasing to the highest level for close to four weeks at above 3.60%. Higher yields continued to provide important support to the dollar and, after a period of correction, the US currency posted further gains to highs above 132.50 against the yen after the Wall Street open.
The US employment trends index strengthened to 118.7 from 116.3 previously, maintaining confidence in a strong labour market, although there was also evidence of a slowdown in wage increases. Atlanta Fed President Bostic stated that interest rates may well have to increase further than expected.
The dollar maintained a strong tone and extended gains to 1-month highs above 132.80 against the Japanese currency before a limited correction.
Japanese data recorded the strongest increase in total cash earnings since 1997, maintaining speculation over a shift in Bank of Japan policy. In this context, there will be a further focus on the next central bank governor and the outlook for monetary policy.
The US currency continued to gain support on yield grounds, although the yen secured tentative gains with the dollar around 132.10 in early Europe.
The UK PMI construction index edged lower to 48.2 for January from 48.8 the previous month. This was below consensus forecasts of 49.6 and the lowest reading for 32 months. New orders and employment also continued to decline for the month, but there was a rebound in business optimism to a 6-month high. There was a further net easing of cost pressures with the second-slowest rate of increase since December 2020.
There was further hawkish rhetoric from Bank of England MPC member Mann who commented that the central bank needed to stay the course and that in her view the next move is still likely to be for a further hike rather than for a cut or hold in rates.
She added that there were still upside inflation risks and monetary policy needs to lean against these risks. She also considered that any pause in rates would look too much like fine tuning to be good monetary policy. In contrast, Oxford Economics stated that the UK was one of the countries most vulnerable to monetary overkill.
Sterling managed to regain some ground against the Euro during the day, especially after Mann’s comments, but was unable to make any significant impression against the strong dollar. The Euro settled around 0.8930 while the dollar dipped to near 1.2000 at the European close.
BRC data recorded a 3.9% annual increase in like-for-like sales for January from 6.5% previously, but Barclaycard reported stronger spending for the month.
Sterling overall edged higher to 1.2030 against the dollar with the Euro retreating to around 0.8920 as markets continued to monitor risk conditions.
Total Swiss sight deposits increased marginally to CHF528.1bn in the latest week from CHF528bn the previous week. After a sustained period of declines, markets will be monitoring whether there is a sustained recovery. The Swiss franc was able to make renewed gains on Monday with the Euro retreating to just below 0.9950 before a slight recovery while the dollar secured a limited net advance. The franc held steady on Tuesday with the dollar around 0.9265.