EUR / USD
The Euro was unable to find any relief ahead of Friday’s New York open with the dollar again gaining net support from a fragile risk tone. The Euro was also hampered by weaker than expected German data and a slightly smaller than expected improvement in consumer confidence.
The US PCE prices index recorded a 0.6% increase for January with the annual increase strengthening to 5.4% from 5.3%. The core index also increased 0.6% on the month compared with expectations of 0.4%. The year-on-year increase strengthened to 4.7% from 4.6% and significantly higher than market expectations of 4.3%.
Given that the PCE index is a core inflation metric for the Federal Reserve, the stronger than expected reading reinforced market fears that the Federal Reserve would have to take a more aggressive stance in raising interest rates to bring inflation under control.
These expectations underpinned the dollar with the currency index posting 7-week highs while the Euro also dipped to 7-week lows below 1.0550.
The University of Michigan consumer confidence index was revised higher to 67.0 for February from the flash reading of 66.4with a dip in current conditions offset by stronger expectations. The 1-year inflation expectations index edged lower to 4.1% from 4.2% for the flash reading.
The dollar maintained a strong tone into the New York close, especially with defensive support as Wall Street equities moved lower.
CFTC data released for late January recorded a further net increase in short Euro positions. ECB President Lagarde stated that there will be a further 50 basis-point hike at the March meeting and thereafter be will be data dependent with no significant Euro support.
The dollar maintained a strong tone close to 7-week highs in early Europe with the Euro held around 1.0540 as risk conditions remained fragile.
The yen steadily lost ground ahead of Friday’s US open with expectations of a dovish Bank of Japan policy undermining support and the dollar advanced to above 135.50. Personal income data was weaker than expected for January, but there was a stronger than expected increase of 1.8% for personal spending.
Treasuries steadily lost ground following the US data releases with the 10-year yield increasing to just above 3.95%.
Higher yields continued to support the dollar and the yen was unable to gain any traction with the dollar posting further strong gains to highs near 136.50.
Cleveland Fed President Mester stated that inflation is still too high and that risks are still tilted to the upside. She still thinks that rates need to be somewhat above 5.0%.
Fed Governor Jefferson stated that the current pace of wage increases is not consistent with 2% inflation.
There was slightly less hawkish rhetoric from St Louis Fed President Bullard who stated that the economy may fall under the rubric of credible disinflation.
Over the weekend, Bank of Japan Governor Kuroda stated that he is resolved to maintain an ultra-loose policy. In further testimony to parliament, Governor Nominee Ueda stated that trend inflation must heighten sharply for the central bank to shift policy and the dollar settled around 136.30 against the yen.
Sterling was unable to gain any support after Friday’s European open with a drift towards 1.20 against the dollar. Bank of England Monetary Policy Committee member Tenreyro stated that the impact of the energy price shock and lags in monetary policy brought the risk of raising borrowing costs too high.
The overall stance was dovish, but the impact was limited given that she dissented against the last two Bank of England rate decisions and has maintained a dovish stance. Sterling was hurt by weaker equities and dollar strength after the US data. Sterling dipped to lows around 1.1930 against the dollar amid fragile risk conditions.
Over the weekend, there were further intense negotiations surrounding a deal with the EU over the Northern Ireland protocol. EU Commission President von der Leyen and Prime Minister Sunak are due to hold a press conference on Monday with strong expectations of a deal, but with scope for notable opposition to any agreement, especially from the Northern Ireland DUP. The market impact was limited with Sterling held below 1.1950 on Monday and the Euro holding gains at around 0.8830.
The Swiss franc was again unable to gain any traction during Friday with expectations of higher global interest rates continuing to sap support. The Euro posted a net gain to 0.9920 while the dollar posted a second successive day of strong gains with a move to highs just above 0.9400. Expectations of further global central bank hikes continued to curb franc support with the Euro around 0.9925 on Monday and the dollar posting 10-week highs around 0.9415.