EUR / USD
The Euro continued to take advantage of a weak dollar in early Europe on Thursday with fresh 31-month highs just above 1.2250. US initial jobless claims increased to 885,000 in the latest week from 862,000 previously and well above consensus forecasts for the second successive weak with expectations centred on 800,000. Continuing claims declined to 5.51mn from 5.78mn the previous week, but the data maintained reservations over the labour-market developments.
The Philadelphia Fed manufacturing index declined to 11.1 for December from 26.3 previously and below market expectations of 20.0. There were solid increases for new and unfilled orders on the month and employment posted a further gain while pricing pressures eased sharply. Companies remained optimistic over the six-month outlook. Housing starts increased to an annual rate of 1.55mn for November from 1.53mn the previous month with building permits increasing to 1.64mn from 1.54mn.
The dollar overall remained on the defensive with on-going expectations of a very supportive Federal Reserve policy following Wednesday’s dovish statement.
Commodity currencies also posted net gains with the Euro hitting highs just above 1.2270. Overall dollar sentiment remained weak, but there was a slightly more cautious tone on Friday with underlying pressure for a limited correction after sharp losses. There was dollar selling on rallies with the Euro close to 1.2250.
The dollar remained firmly on the defensive ahead of Thursday’s New York open while the Japanese yen remained resilient despite gains in global equity markets and strong risk appetite. There was further speculation that Japanese investors would curb capital outflows on yield grounds or hedge flows against currency risk. The dollar dipped to 9-month lows below the 103.00 level. Markets continued to monitor progress towards a fiscal support package with indications that there could be further delays as Senate majority leader McConnell pledged to work through the weekend in order to finalise an agreement.
The Bank of Japan announced that the corporate funding package would be extended, in line with expectations. Other policy instruments were unchanged at the meeting with the short-term interest rates at -0.1%. The bank will also engage in another review on how to achieve a more effective monetary framework to achieve its inflation goal. The overall impact was limited, but the yen did lose ground on the crosses as correlations with equities again broke down with the Japanese currency weakening despite a limited retreat in US futures. The dollar recovered to near 103.50 before stalling as the US currency secured tentative net relief.
In comments on Thursday, EU Chief Negotiator Barnier stated that trade talks were now in the final phase, progress had been made and that a deal was within reach this week. Although other EU sources were less confident, there were expectations that there would be agreement.
Positive rhetoric from Barnier pushed Sterling to 30-month highs above 1.36 against the dollar with the Euro dipping below 0.9000.
The Bank of England held interest rates at 0.1% and made no changes to the asset-purchase programme. Although the economy had performed slightly better than expected, the impact of coronavirus restrictions was likely to have a larger impact during the first quarter of 2021. The bank warned that the outlook was extremely uncertain and it was prepared to ease policy if needed. There were strong hints that there would be easing if there was no Brexit trade deal and Sterling edged lower.
After another call with UK Prime Minister Johnson, EU Commission President von der Leyen welcomed substantial progress on many issues, but noted that there were still big differences to be bridged, especially in fisheries. The UK side was again more pessimistic and reiterated that no deal was likely unless there was a substantial change in the EU position. Sterling retreated after the UK comments with the Euro near 0.9050. UK consumer confidence recovered slightly to -26 for December from -33 previously. The UK currency retreated to below 1.3550 amid a slight dollar recovery with November UK retail sales declining 3.8% amid covid restrictions.
In its latest monetary policy report, the Swiss National Bank maintained interest rates at -0.75% following the latest policy meeting which was in line with expectations. The bank reiterated that the franc was very highly valued and that the US Treasury report has no impact on Swiss policy. In this context, the bank remains willing to intervene more strongly in currency markets with bank chair Jordan reiterating that Switzerland was not a currency manipulator.
The Swiss franc edged lower following the announcement and gradually lost ground during the day as risk appetite held firm. The Euro strengthened to the 1.0850 area with the dollar around 0.8850. The Euro edged lower on Friday with the dollar unable to make any headway.