EUR / USD
The Euro was unable to make any headway ahead of Tuesday’s New York open with the dollar holding firm amid expectations of relatively hawkish rhetoric from Fed Chair Powell while equities remained fragile. ECB council member Nagel stated that it would be dangerous to think that the inflation problem is solved. He added that more significant rate increases are needed and that rate cuts are not on the agenda.
Overall the Euro lost further ground ahead of Powell’s comments with 1-month lows just below 1.0670 as the on-going correction continued.
Fed Chair Powell repeated comments that the disinflation process is underway in the economy, but it has a long way to go. In particular, Powell stated that the Fed is not seeing disinflation in the core services sector and that rates will need to stay high to achieve this key element. He added that the lack of progress in core services excluding housing is what worries him, although he was more confident of disinflation in the housing sector.
He reiterated that the central bank is data dependent and that rates could be raised higher than is priced in if the data is stronger than expected.
Powell also considers that the labour market remains extremely tight and this may be a structural issue. He did, however, add that wage increases have reduced to a level closer to a sustainable level. There was very choppy trading surrounding Powell’s comments with the dollar initially sliding before a rapid recovery.
The Euro spiked to highs just above 1.0750 before dipping back below 1.0700 and then regaining ground again as equities rallied amid hopes that inflation would decline further. The Euro settled around 1.0730 and there was little change on Wednesday as stable risk appetite curbed potential defensive demand for the US currency.
The overall US trade deficit widened to $67.4bn for December from a revised $61.0bn the previous month with exports and imports both edging lower on the month. For 2022 as a whole the shortfall widened 12.2% to a record $948bn which will represent a potential dollar headwind.
The US IBD consumer confidence index recovered to 45.1 for February from 42.3 the previous month which suggested consumer resilience.
Minneapolis Fed President Kashkari stated that central bank will have to do more on interest rates if financial conditions are easier. He added that he was more cautious than markets on the rate path, especially with wages growth still strong while the housing market is starting to show signs of life again.
There was choppy trading in Treasuries following Powell’s comments. A brief spike took the 10-year yield down to 3.60%, but selling emerged very quickly with the yield back above 3.65% with volatility in the bond and equity markets translating into choppy currency moves.
After a slide to 130.50, the dollar also recovered quickly to above 131.00 with Wall Street indices eventually posting significant net gains after very volatile trading.
There was further uncertainty over the next Bank of Japan Governor, although overall volatility eased with the dollar around 131.30 on Wednesday.
Sterling remained under pressure after Tuesday’s European open with a test of support below 1.2000 against the dollar. Overall risk conditions were generally more cautious, especially with concerns that a more hawkish Federal Reserve stance could lead to further US and global economic damage.
Bank of England comments during the day were limited to a potential digital currency with no further commentary on interest rates.
Overall, Sterling dipped to 1-month lows close to 1.1960 against the dollar before being subjected to high volatility following Fed Chair Powell’s comments. Sterling spiked to highs just above 1.2090 before declining equally rapidly to below 1.2000 again.
The Euro was unable to make any headway and settled just above the 0.8900 level. The NIESR cut its 2023 GDP growth forecast to 0.2% from 0.7% previously with the 2024 forecast cut to 1.0% from 1.7%, although these forecasts are more optimistic than the Bank of England. Gains in equities helped underpin Sterling as it traded around 1.2040 against the dollar on Wednesday with the Euro holding just above 0.8900.
The Swiss franc posted significant gains on Tuesday with a dip in market confidence surrounding a benign global economic outlook triggering renewed demand for the currency. The Euro dipped to 4-week lows below 0.9880 before a tentative recovery while the dollar posted net loses to 0.9220 despite gains elsewhere.
There was little net change on Wednesday with markets continuing to monitor global central bank rhetoric and the dollar traded around 0.9220.