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EUR / USD

According to flash data, the German manufacturing PMI index retreated to 57.0 for January from 58.3 and below expectations of 57.5 while the services index was marginally lower at 46.8, but above market expectations. The Euro-zone PMI manufacturing index declined slightly to 54.7 from 55.2 with the services sector index slightly above expectations at 45.0 from 46.4 previously. There was some relief following the data and the Euro resisted losses although the main feature was narrow ranges into the US open. The Euro was resilient despite a further widening of the Italian-German 10-year yield spread to 9-week highs.
The US manufacturing PMI index strengthened to 59.1 for January from 57.1 the previous month and above consensus forecasts of 56.5 while, more impressively, the services sector index strengthened to 57.5 from 54.8 and well above market expectations of 53.6 for the month despite coronavirus restrictions.
Existing home sales also beat expectations with an increase to 6.76mn from 6.71mn previously, maintaining housing-sector strength.
The dollar was unable to gain significant support as potential support from stronger than expected data was offset by a dip in defensive demand. The US currency secured some relief against commodity currencies and settled around 1.2170 against the Euro.
CFTC data recorded a net increase in long Euro positions to 163,000 contracts in the latest week, lessening the potential for further buying and maintaining the possibility of a sharp correction if there is a shift in sentiment. Despite Euro-zone coronavirus reservations and further uncertainty over the Italian political situation, US dollar weakness dominated on Monday with the Euro around 1.2175 as commodity currencies posted net gains.

JPY

The dollar remained generally weak on Friday, but did move higher following the latest US PMI data. The Japanese yen lost some ground even though bond yields edged lower and equities lost ground and the US currency edged higher to around 103.80 at the New York close.
Markets expect that the Federal Reserve will maintain a notably dovish stance at this week’s policy meeting, but fresh fears over the near-term outlook could trigger renewed defensive support for the US currency. Progress on economic support measures will also be a key factor in the short term as Congress returns to session.
There were some reservations over US-China relations with a US aircraft carrier group entering the South China Sea over the weekend. Comments from the Biden Administration on foreign policy will be monitored closely in the short term even if economic developments dominate and the fiscal stimulus dominate sentiment.
The dollar was unable to make headway on Monday and settled around 103.70 against the Japanese currency with the yen slightly weaker on the crosses.

GBP

According to the flash reading, the UK PMI manufacturing index declined to 52.9 for January from 57.5 previously and below consensus forecasts of 57.3. The services-sector index retreated sharply to an 8-month low of 38.8 from 49.4 and below forecasts of 49.9 with the composite production index also at 8-month lows. There were important supply-chain difficulties within manufacturing and the underlying performance was weaker than the headline would suggest. The services sector was inevitably undermined by coronavirus restrictions, reinforcing expectations of a sharp first-quarter GDP contraction.
Sterling continued to lose traction following the data with concerns over underlying vulnerability, especially with speculation that there would be further delays in re-opening schools and easing coronavirus restrictions. There will be further fiscal stresses, increasing the pressure for further Bank of England action.
The UK currency still gained some protection from optimism over the vaccine programme and the number of new cases continued to ease slightly. After dipping to lows below 1.3650, Sterling recovered to around 1.3680 while the Euro peaked at 0.8920 before retreating to just below the 0.8900 level. Sterling made net gains on Monday despite coronavirus concerns with the UK currency back above 1.3700 against the US currency while the Euro retreated to 0.8875 as risk appetite held firm.

CHF

The Swiss franc was again held in very tight ranges with some protection from the more vulnerable tone in global risk conditions. The Euro overall posted a marginal net advance to 1.0775 with the dollar unable to sustain gains and settling around 0.8850.
Unease over the Italian political situation provided some support for the Swiss currency, although overall moves were limited. The Euro edged higher to 1.0780 on Monday while the dollar was trapped close to 0.8850 as the US currency posted wider losses.

Contents

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