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The German ZEW economic sentiment index strengthened to 61.8 for January from 55.0 the previous month and above consensus forecasts of 60.0. The current conditions index recorded only a marginal recovery to -66.4 from -66.5, although slightly stronger than market expectations. The Euro-zone ZEW index strengthened to 58.3 from 54.4 the previous month. The Euro was hampered to some extent by reports that the ECB would pursue a yield-control policy.

The Euro continued to make limited headway ahead of the New York open, primarily under the impact of a weaker US dollar. The single currency moved above the 1.2100 level and advanced to highs around 1.2145 with expectations that the US would pursue aggressive monetary and fiscal policies.

German Chancellor Merkel reached a deal with state leaders to extend the national lockdown measures until February 14th which was in line with market expectations

The Euro was unable to make further headway in New York trading, but the dollar also failed to secure a significant recovery and the Euro held above the 1.2100 level.

There were strong expectations of reflationary policies by the US Biden Administration, especially with strong expectations of further fiscal support. US inflation expectations increased to the highest level since October 2018 which implied a further erosion of real yields and contributed to a weaker US dollar.

The Italian government survived a Senate confidence vote which capped domestic bond yields, but there were further near-term concerns over euro-zone coronavirus developments. Dollar weakness dominated on Wednesday with the Euro edging just above 1.2150 as commodity currencies posted net gains.


US equity futures held gains into the New York open, although markets were unable to extend gains and the dollar was held below the 104.00 level against the yen.

In prepared comments, Treasury Secretary Nominee Yellen confirmed the smartest thing to do right now is to act big in support measures for the economy, especially with interest rates at historic lows. Yellen also noted that she and Biden had appreciation for the national debt burden. As far as currencies are concerned, she commented that she wanted market-set exchange rate and would not seek a weaker US dollar and reiterated opposition to competitive devaluations by other countries. The rhetoric overall confirmed market expectations that there would be no opposition to a weaker US currency provided the retreat was orderly. Unease over near-term coronavirus developments also continued with the US death toll passing 400,000 as vaccination delay fears had a slight impact in curbing risk appetite.

The Bank of Japan is not expected to make any significant changes at the latest policy decision due for announcement on Thursday.

US equity futures were little changed on Wednesday with the dollar around 103.80 as the yen resisted significant net losses despite gains in global equities.


Sterling was confined to relatively narrow ranges on Tuesday as global developments tended to dominate. The UK currency was protected by underlying optimism over vaccine developments, but there were also concerns over the near-term outlook, especially with expectations that the UK lockdown would be extended.

The UK also reported a record-high number of coronavirus deaths of just over 1,600 for the day, but markets drew some solace from the decline in new cases.

The UK currency strengthened above the 1.2600 level against the US dollar and held above this level into the European close while the Euro settled just below 0.8900 from highs close to 0.8920. Sterling was supported by expectations of global reflation would help underpin the UK economy.

Bank of England chief economist Haldane stated that the bounce back from the covid pandemic may be sharper than that for the financial crisis and also commented that the UK does not need higher inflation that would cause borrowing costs to increase. Sterling nudged higher following the relatively optimistic comments, although reaction was limited given that negative rate speculation has faded. The headline CPI inflation rate edged higher to 0.6% from 0.3% with the core rate at 1.4% from 1.1% and above expectations of 1.3%. Sterling edged above 1.3650 against the dollar with the Euro just below 0.8900 as the dollar remained on the defensive.


The Swiss franc held firm in early Europe on Tuesday, although it gradually lost traction during the day as global risk appetite held firm. The Swiss currency was also undermined to some extent by expectations of global reflation, but low global yields discouraged potential franc selling.

The Euro edged higher to the 1.0780 area while the dollar dipped to lows around 0.8865 before stabilising. The Swiss currency lost some ground on Wednesday amid expectations of a global recovery with the Euro around 1.0790, although the dollar was held below the 0.8900 level.



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