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Daily FX Report

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EUR / USD

The Euro retreated in early Europe on Monday and was unable to regain traction during the day. The single currency was unsettled to some extent by unease over Brexit developments with short-term coronavirus developments also a factor while the US dollar also secured a respite.

US producer prices increased 0.1% for November with underlying prices also increasing 0.1% on the month to give a year-on-year increase of 1.4%.

The University of Michigan consumer confidence index strengthened to 81.4 for December from 76.9 previously and above consensus forecasts of 76.5. There were significant increases for the current conditions and expectations components on the month.

There was further speculation that the Federal Reserve could consider fresh stimulus measures if there is no agreement on a new fiscal stimulus early this week.

The US currency was still able to secure some respite amid a more cautious tone and the Euro retreated towards 1.2100 into the European close.

CFTC data registered a renewed increase in long Euro positions while dollar shorts increased to a 3-month high, maintaining the risk of a correction if there is any shift in sentiment. The Euro regained ground on Monday with Brexit developments providing some support and traded just below 1.2150 against the weak dollar despite fresh concerns over German coronavirus developments. The dollar was hampered to some extent by speculation over a dovish Federal Reserve statement on Wednesday.

JPY

The Japanese yen drew support from weaker risk conditions on Friday as Wall Street indices edged lower. The dollar broke below the 104.00 level with lows near 103.80 as the Japanese currency gained some support on the crosses, although overall ranges were relatively narrow.

The FDA approved the use of Pfizer’s coronavirus vaccine for emergency use which helped underpin sentiment, although there were still important reservations over the near-term outlook given the high level of infection rates and restrictions on economic activity in New York and California.

The Bank of Japan Tankan business survey for large manufacturers improved to -10 from -15, the strongest figure since March 2020 and there was a small recovery for non-manufacturing to -5 from -7, but there was a sharp reduction in capital spending plans as underlying caution prevailed.

The Chinese central bank adopted measures to curb potential inflows, although the yuan maintained a strong tone. The dollar was able to resist further losses against the yen on Monday to trade close to the 104.00 level while the Japanese yen lost ground on the crosses with the Euro trading above 126.0.

GBP

Bank of England Governor Bailey stated that the UK financial sector was prepared for all Brexit eventualities, but also warned that there would be disruption to the economy. Markets remained uneasy over the outlook, especially with expectation that there would be significant economic disruption even in a best-case scenario.
Political rhetoric was notably downbeat on Friday with both UK Prime Minister Johnson and EU Commission President von der Leyen both warning that a no-deal outcome was more likely than a deal. Sterling slumped to lows below 1.3150 against the dollar before a limited recovery while the Euro surged to 12-week highs around 0.9230. The UK currency secured limited relief later in the session amid short covering, but sentiment remained extremely fragile. CFTC data recorded that there was a switch to a small net long Sterling position in the latest week for the first time since late September, increasing the risk of selling on negative political developments.

Following another conference call on Sunday, Johnson and von der Leyen agreed that talks should continue. Johnson was still attempting to talk directly with German Chancellor Merkel and French President Macron, but there was further opposition from the EU Commission.

Sterling posted sharp gains at the Asian open on relief that talks would continue with a peak above 1.3350 against the dollar and the Euro retreating to below 0.9100. The UK currency was unable to extend on Monday amid concerns over the economic outlook with an update from EU Chief Negotiator Barnier due after the open.

CHF

The Swiss franc was unable to gain further support on Friday with the Euro recovering to near 1.0780 while the dollar edged away from 5-year lows to trade near 0.8900. The Swiss currency had been underpinned during the week by near-term reservations over coronavirus developments, but failed to gain further ground on Friday.

Markets will still be watching for any release of the US Treasury report on currencies which could call Switzerland as a currency manipulator. The decision to continue Brexit trade talks undermined the franc to some extent with the Euro around 1.0790 while the dollar settled around 0.8885.

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