EUR / USD
The Euro edged higher into Thursday’s New York open as the dollar lost its grip to some extent, but there was still a very important element of caution.
ECB council member Villeroy stated that the central bank will bring inflation back to 2% by the end of 2024 or early 2025.
US initial jobless claims increased to 211,000 in the latest week from 190,000 previously which was above consensus forecasts of 195,000 and the highest reading since late 2022. Continuing claims also increased to 1.72mn from a revised 1.65mn and equalled the highest figure since early 2022.
Challenger job cuts declined to just below 78,000 for February from just below 103,000 the previous month, but this was still a substantial increase from the level near 15,000 last year. For the first two months of 2023, the number of layoffs was the highest since 2009.
The data triggered some reservations surrounding labour-market trends, although the overall impact was limited at this stage with markets assuming that the Federal Reserve would want a sustained period of soft data before concluding that the labour market has weakened.
The Euro gradually posted net gains with a move to around 1.0580 after the US open and held tentative net gains.
US equities dipped sharply after the European close with heavy losses in the banking sector as contagion fears intensified As Wall Street equities moved sharply lower, US yields declined which also sapped dollar support. In this context, the Euro was around 1.0590 in early Europe on Friday.
The latest US employment report will be very important for Federal Reserve expectations and dollar moves on Friday. After last month’s surge in non-farm payrolls of over 500,000, consensus forecasts are for an increase of around 220,000 with the unemployment rate holding at 3.4% and 0.3% increase in average hourly earnings.
The yen the maintained a firm tone after Thursday’s European open with a slide towards the 136.00 level against the dollar. There was further choppy trading after the US data, but the US currency continued to find support at lower levels. There was little net change in Treasuries with the 10-year yield around 3.96% while Wall Street equites secured a limited net advance. The dollar did recover to around 136.15 at the European close as overall yield spreads continued to limit yen support.
US equities posted sharp losses later in the session with a slide in the banking sector amid fears over further collapses after the Silvergate liquidation.
There was strong buying of Treasuries and lower yields sapped dollar support as it traded below 136.00 against the yen.
The Bank of Japan held policy steady at Governor Kuroda’s final meeting with interest rates at -0.1% and a 1% cap for the 10-year yield. Although consensus forecasts were for no change, the yen dipped sharply after the decision given some speculation that there could be a policy change.
The dollar surged to highs just below 137.00 before fading to near 136.50 as equities remained on the defensive with high volatility inevitable during the day.
There were no significant domestic developments on Thursday with markets continuing to mull the outlook for interest rates. There are still strong expectations that the Bank of England will sanction a further 25 basis-point hike to 4.25% this month, but also expectations that the central bank will take a less aggressive stance than the Federal Reserve and ECB. There were, however, hopes that the economy will prove resilient, especially with increased room for fiscal support given lower gas prices.
Overall risk appetite also attempted to stabilise in Europe which limited the potential for further Sterling selling and it advanced to highs around 1.1935 against the dollar while the Euro retreated to 0.8870. The currency was also broadly resilient despite a later slide on Wall Street.
The UK data recorded 0.3% growth for January compared with expectations of no change with a rebound in the services sector which offset contraction in the industrial and construction sectors. The data provided significant relief and Sterling posted net gains with a move to near 1.1950 against the dollar with the Euro around 0.8870.
The Swiss franc was able to secure limited net gains on Thursday with further expectations that the National Bank would adopt a hawkish policy stance at this month’s policy meeting. There were also expectations that the National Bank would look to curb franc losses as part of the strategy to control inflation. The Euro retreated to 0.9900 while the dollar dipped to 0.9360. The slide in US equities triggered renewed demand for the Swiss currency. The Euro dipped to lows below 0.9850 before attempting to stabilise while the dollar also posted sharp losses to lows near 0.9280 before settling just below 0.9300.