EUR / USD
The Euro continued to take advantage of dollar weakness in early Europe on Wednesday, but there was selling interest above 1.2150 as resistance levels held. The Euro gradually retreated into the New York open with significant losses on key crosses and a retreat to just below 1.2100 against the US currency.
The US NAHB housing index retreated to 83 for January from 86 the previous month and compared with expectations of an unchanged reading. Higher yields and fresh coronavirus restrictions may have had an impact, although confidence remained very high in historic terms.
The US currency was undermined by strong risk appetite and expectations of a global economic rebound and the Euro was able to resist further losses. Volatility eased later in the session with the Euro settling just above 1.2100 as overall risk appetite remained strong.
The ECB will announce its latest policy decision on Thursday with no change expected in interest rates or the asset-purchase programme. The comment on the economic outlook from President Lagarde will be watched closely and rhetoric surrounding the Euro will also be an important element. Markets will also be watching any comments on yield-curve control following speculation that the bank would look to cap yields.
Markets will also watch the latest PMI business confidence data on Friday amid expectations of further contraction in the services sector. The dollar again lost ground in early Europe on Thursday amid robust risk appetite with the Euro around 1.2130 as commodity currencies secured fresh gains.
US equity futures held gains into Wednesday’s New York open amid positive risk appetite. Wall Street equities posted fresh record highs amid expectations of further strong fiscal support and a very accommodative Federal Reserve policy. Although equities moved higher, there was no increase in bond yields which curbed potential dollar support and it failed to make headway in the Japanese currency. There was relief that President Biden’s inauguration passed with no significant incident. As expected, Biden issued a series of executive orders to reverse many of Trump’s policies with the mandating of mask wearing in federal buildings.
The Japanese yen maintained a firm overall tone despite strong global equities and the dollar dipped to lows just below 103.50.
The Bank of Japan held interest rates at -0.1% at the latest policy meeting, in line with consensus forecasts. The bank upgraded its economic forecasts for the next fiscal year, but also warned over the near-term outlook, especially for consumer spending. The yen maintained a firm overall tone following the decision despite gains in equities. The dollar continued to edge lower to the 103.40 area as the Japanese currency again resisted selling pressure on the main crosses.
Sterling continued to make headway in Europe on Wednesday with the higher than expected inflation data continuing to provide some support amid speculation over a less dovish Bank of England stance. There was also further optimism over the UK vaccination programme while global risk appetite remained an important prop.
The Euro came under significant pressure and dipped to 8-month lows below 0.8850 while the UK currency also re-tested the important 1.3700 area against the US currency. Another failure to break through helped trigger a significant correction.
Bank of England Governor Bailey was optimistic that the UK economy would not see the same amount scarring as was seen after the 1980’s recession. He also noted that inflation was still very low despite the increase in the recent data while there was a high degree of uncertainty over what people will do with increased savings. He also noted that no decision had been made on negative interest rates.
Overall, Sterling faded to consolidate near 1.3650 against the dollar while the Euro recovered to 0.8870. Strong global risk appetite continued to provide underlying UK currency support with a fresh move to 1.3700 against the US currency with the Euro weakening to near 0.8850.
The Swiss franc continued to lose ground in early Europe on Wednesday with strong global risk conditions limiting support for the Swiss currency. The Euro strengthened to near 1.0800, but was unable to break above this level and ended little changed while the dollar consolidated close to 0.8900 from 0.8870 lows.
Overall Swiss moves were contained and the franc gained an element of support from expectations of negative real yields elsewhere. The strength in global equities did undermine the Swiss currency to some extent with the Euro edging higher to the 1.0785 area and the dollar below 0.8900.