EUR / USD
There was an underlying tone of consolidation ahead of Tuesday’s New York open with further uncertainty surrounding the financial sector. German yields moved sharply lower at the European open, but there was a rebound later in the session. The US NFIB small-business confidence index edged higher to 90.9 for February from 90.3 previously. The proportion of companies seeing inflation as the most important problem increased slightly on the month.
US consumer prices increased 0.4% for February which was in line with consensus forecasts and the year-on-year rate retreated to 6.0% from 6.4% which was also in line with expectations. Food prices increased 9.5% over the year while energy prices increased 5.2% after a monthly decline of 0.6%.
Underlying prices increased 0.5% on the month, slightly above consensus forecasts of 0.4%, although the year-on-year increase matched expectations at 5.5% from 5.6% previously. Used vehicle prices dipped for the seventh successive month with a 13.6% annual decline, but there was a strong increase in shelter prices as well as transport services. The dollar edged lower following the data, but the Euro was unable to challenge the 1.0750 area.
The data is likely to maintain concerns that core inflation will be stubborn and difficult to bring under control. From a market perspective, however, there will be important doubts whether the Federal Reserve will be willing to tighten monetary policy further in the near term given the financial-sector stresses.
Futures markets indicated around an 80% chance that the Fed Funds rate would be increased 25 basis points to 5.00% at next week’s meeting with reduced expectations of no rate hike. Markets will remain on alert for any unofficial Fed leaks through the Wall Street Journal.
The dollar still struggled for any traction and the Euro settled around 1.0740 with little net change on Wednesday as markets continued to monitor risk conditions.
US Treasuries lost ground after the European open on Tuesday with a strong rebound in the 2-year bond yield from Monday lows around 3.85% to around 4.25% and the dollar was able to recover ground against the Japanese currency with a move to the 134.00 area.
There was a relatively muted reaction to the latest US inflation data, but Treasuries continued to lose ground as bond yields continued to move higher.
Equity markets also moved higher with the combination undermining yen demand and the dollar posted further gains to above 134.50.
The dollar was unable to hold the gains and drifted back towards 134.15 at the New York close as choppy trading continued.
The retail sales data will be watched closely on Wednesday with expectations of a limited correction after last month’s 3.0% jump.
Chinese industrial production and retail sales data was close to expectations and the statistics bureau stated that the economy is showing signs of stabilisation and recovery. The comments helped limit potential downside for equities, but did not provide a significant lift to risk appetite.
Markets were continuing to monitor any news on Japanese wage settlements and the dollar secured a net advance to around 134.60 at the European open.
Sterling tended to edge lower following the latest UK labour-market data. The tentative slowdown in wages growth increased speculation that the Bank of England might be able to adopt a more dovish policy stance. There was a net overall shift in Bank of England expectations with futures markets indicating a 40% chance that the central bank will leave rates on hold at 4.00%. US and Euro-Zone yields recovered during the day which limited support for the Pound.
Sterling was unable to make headway later in the day, but selling pressure was limited as overall global risk appetite attempted to recover.
There was selling pressure close to 1.2200 against the dollar, but losses were limited and it settled around 1.2170 as UK sentiment remained slightly firmer.
The budget will be released on Wednesday with expectations that energy-support measures will be increased, but the overall impact is likely to be limited.
Risk conditions were relatively stable on Wednesday with Sterling holding just above 1.2150 against the dollar and the Euro edging higher to 0.8835.
Risk conditions remained important for the Swiss franc on Tuesday and the more positive tone in global markets was a key element curbing demand for the currency. A rebound in US and German bond yields also undermined potential support for the franc as it registered net losses.
The Euro strengthened to the 0.9815 area while the dollar secured a net recovery to 0.9150 before a slight decline to 0.9140 on Wednesday.