EUR / USD
The German headline inflation rate edged higher to 8.7% from 8.6% the previous month, although this was below consensus forecasts of 8.9%. There was little impact on ECB expectations given that the Euro-Zone data had already been released. The Euro posted net gains into the New York open with increased optimism over the global growth outlook while gains in equities were significant in curbing defensive demand for the US dollar.
US initial jobless claims increased to a 4-week high of 196,000 in the latest week from 183,000 previously and above consensus forecasts of 190,000 while continuing claims increased to 1.69mn from 1.65mn. The claims data triggered some speculation that the labour market was starting to cool, especially with evidence of increased layoffs. There was still significant caution ahead of next week’s consumer inflation data with concerns over a higher than expected core print.
The Euro strengthened to highs just above 1.0790 before fading as equity markets pared gains. As Wall Street moved into negative territory, the Euro dipped below 1.0750. The risk tone remained more fragile on Friday which underpinned the dollar with the Euro trading around 1.0725.
According to sources, the Japanese government will present its nominees for Bank of Japan Governor on February 14th. The dollar was unable to gain any traction ahead of the New York open and gradually drifted lower as overall volatility remained higher.
Richmond Fed Barkin stated that the effects of Fed tightening have been substantial and that it makes sense for the Fed to steer more deliberately from here due to lagged policy effects. This was a slightly more dovish stance than from other FOMC members.
US Treasuries posted gains after the US data with the 10-year yield dipping below 3.60% and lower yields undermined the US currency. The US currency did, however, find support below 130.50 and moved above 131.00 amid a wider recovery in the US currency.
Bank of Japan Governor Kuroda stated that the benefits of monetary easing are greater than the side effects. Bank member Amamiya, who is considered, a top candidate to be the next governor stated that there was no need now to make yield curve control more flexible, but add that the costs and benefits must be weighed carefully. There will be further volatility surrounding the nomination process with an official announcement expected next week.
The firm overall dollar tone remained the key influence in Asia on Friday with the US currency strengthening to 131.85 before settling just above 131.50.
Sterling held a firm tone in early Europe on Thursday with firm risk appetite helping to underpin the UK currency. Bank of England Governor Bailey retreated that the headline inflation rate is likely to decline sharply this year, but he also noted that the bank needed to see more evidence of inflation pressure easing..
Chief economist Pill stated that the bank was seeing some signs of loosening in the labour market and he also noted that there is substantial further monetary tightening to come through as a result of lags in policy transmission. He did, however, add that there was no room for complacency.
There was notable evidence of divisions within the committee as MPC member Haskel stated that inflation uncertainty should be met with forceful action. He also expressed unease over inflation trends and considered that there are considerable upside risks to the bank’s inflation forecast. In contrast, fellow member Tenreyro stated that rates are too high right now and that she was likely to vote for a rate cut at one of the forthcoming meetings.
Sterling continued to gain ground as equities posted gains with a peak just below 1.2200 against the dollar while the Euro retreated to the 0.8850 area. As equities retreated, Sterling dipped back below towards 1.2100 and the Euro attempted to stabilise.
UK GDP was reported as contracting 0.5% for December compared with expectations of a 0.3% decline, but fourth quarter GDP was unchanged given revisions to previous data. Technically, the economy avoided recession which will provide marginal relief, with Sterling holding fractionally above 1.2100 against the dollar.
The Swiss franc lost ground on Thursday with risk appetite continuing to have an important impact on the currency. With increased optimism over the global economy, the Euro edged higher to the 0.9900 level while the dollar was still trapped below the 0.9200 level. The franc selling abated as equities moved into negative territory.
There was little net change on Friday with the dollar edging higher to 0.9230 as overall risk conditions remained a key influence.