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Daily FX Report

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EUR / USD

The Euro continued to drift lower in early Europe on Monday as risk conditions remained fragile. There was also further speculation over a liquidation of stale long Euro positions following the recent retreat and the single currency dipped to fresh 6-week lows at 1.2055.
In its latest monthly report, the Bundesbank stated that the German economy was resilient in the fourth quarter of 2020 as a rebound in construction and industry offset the impact of a slump in the hospitality and retail sectors. The bank did, however, warn that there could be a sizeable setback if infections fail to ease significantly and restrictions on activity persist or are tightened. The German government will hold further talks with regional leaders on Tuesday with expectations that restrictions will be tightened and these concerns will continue to have some restraining influence on the Euro.
Italian Prime Minister Conte continued his efforts to salvage the coalition government, although the overall market impact was still limited.
Overall ranges were narrow, especially with US markets closed for a holiday, together with a lack of new incentives and data releases.
Markets were monitoring US political developments with extremely tight security arrangements in Washington ahead of President-elect Biden’s inauguration on Wednesday. The dollar eased slightly later in the day with a recovery in commodity currencies and the Euro secured a slight net recovery.
Stronger risk appetite curbed potential dollar demand on Tuesday with commodity currencies posting significant net gains and the Euro edged towards 1.2100.

JPY

US equity futures edged higher on Monday, although the dollar failed to make headway as yen maintained a firm tone with the dollar held around 103.70.
Markets will continue to monitor any comments from Treasury Secretary Nominee Yellen who is due to face a Senate confirmation hearing on Tuesday. According to reports Yellen will state that the US should act in a big way to boost fiscal spending. With interest rates at such low levels, she will state that benefits will far outweigh the costs. Expectations of strong fiscal backing provided solid support to risk conditions and markets will also monitor any comments on the US dollar.
President Trump issued a proclamation lifting a travel ban from Europe, but the Biden team rejected the move and stated that measures could be tightened. US equity futures still made headway which curbed immediate demand for the Japanese currency and Asian bourses outside China secured significant gains.
The Bank of Japan is not expected to make major policy changes at this week’s meeting, although the bond-buying programme could be adjusted slightly.
In the positive risk environment, the dollar edged higher to just above the 104.00 level as the Euro posted significant gains against the Japanese currency.

GBP

There were reports that the EU would seek an extension in ratifying the UK/EU trade deal until April from February, although this should not have a significant impact with the deal agreed provisionally and in operation. There will be some reservations over a negative economic impact from increased trade friction, although coronavirus developments are liable to have a much larger impact on activity. Markets were also uneasy over long-term fundamental concerns.
Sterling remained under pressure in early Europe with lows at 1.3520 against the dollar while the Euro strengthened to highs at 0.8925.
The UK currency gradually regained ground with support from optimism over the coronavirus vaccine developments. The UK government announced that the total number of vaccines administered had increased to over 4.0 million with the UK still out-pacing Euro-zone countries.
Expectations that the UK could be able to ease restrictions earlier than euro-zone countries provided an element of Sterling support.
The dollar also faded slightly towards the European close with the UK currency strengthening to near 1.3600 while the Euro retreated to 0.8885. Stronger global risk conditions were significant in supporting the UK currency on Tuesday and it edged above 1.3600 against the dollar with the Euro around 0.8890.

CHF

Swiss sight deposits increased to CHF703.8bn in the latest week from CHF702.4bn the previous week. This was the first increase since mid-December and suggested that the central bank had made a limited move back into the market to sell the Swiss currency.
The Euro edge lower in early Europe with a retreat below the 1.0750 level for the first time in over five weeks. The single currency edged higher later in the day while the dollar stalled around 0.8925. The Euro advanced to 1.0780 on Tuesday as risk appetite strengthened with the dollar holding just above 0.8900.

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