EUR / USD
The Euro was unable to make headway ahead of Friday’s New York open and continued to drift lower. The US currency also gained traction against most major currencies, especially commodity currencies, and the Euro retreated to lows near 1.2080 before stabilisation.
The University of Michigan consumer confidence index declined to 1 6-month low of 76.2 for the preliminary February reading from 79.0 the previous month and below consensus forecasts of 80.8. There was a slight decline in the current conditions index and a sharper downturn in the expectations component while the one-year inflation expectations index increased to 3.3% from 3.0% previously. There were still some near-term reservations over trends in retail sales.
The dollar was unable to make further gains and retreated towards the European close with some evidence of significant selling into the London fix. The Euro moved back above the 1.2100 level and settled around 1.2120 at the New York close.
CFTC data recorded a small net increase in long Euro positions to 140,000 contracts for the latest week from 137,000 previously, maintaining the potential for dollar short covering of the US currency can secure fresh support on fundamentals grounds.
Over the weekend, former ECB President Draghi was installed as Italian Prime Minister which helped underpin confidence. The dollar overall remained on the defensive on Monday amid negative real yields and expectations of global recovery. Commodity currencies posted gains and the Euro edged higher to the 1.2135 area.
The dollar pushed significantly higher into Friday’s New York open with a peak near 105.20 against the yen. Although it initially held firm, there was an erosion of yen support in New York amid wider losses. The Japanese yen was hampered by an increase in US bond yields with the 10-year yield increasing to near 1.2% and the Euro also posted a net advance against the Japanese currency.
CFTC data recorded a decline in long yen positions to 35,000 in the latest week from 45,000 previously, lessening the threat of further dollar short covering.
Japanese GDP recorded an increase of 3.0% for the fourth quarter of 2020, above consensus forecasts of 2.4% and the previous data was revised up slightly. Overall risk conditions held firm on Monday which dampened demand for the Japanese currency as it lost ground on the crosses. Chinese markets remained closed, but the offshore yuan rate made further gains. The dollar overall edged above the 105.00 level despite losses elsewhere with the Euro just above 127.50.
Sterling drifted lower in early Europe on Friday as the raft of data releases failed to provide support. Although the GDP data beat expectations the magnitude of the 2020 decline focussed attention on the long recovery path. There were also further concerns surrounding the underlying budget situation with Chancellor Sunak under pressure to maintain strong support. Sterling dipped to lows near 1.3775 against a firmer dollar, although overall selling was limited.
The NIESR estimated that the economy contracted 5.3% for January following the official 1.2% increase for December which would give a year-on-year decline of 11.5%. No change is expected for February before a significant rebound in March as restrictions start to ease which would give a first-quarter contraction of 3.8%.
Sterling recovered ground in New York and then saw demand into the fix. The UK currency re-tested 1.3850 against the dollar and the Euro dipped below 0.8750.
CFTC data recorded an increase in long Sterling positions to 21,000 contracts in the latest week from 10,000 previously and the largest long Sterling position for 11 months which indicates that hedge fund buying has been stepped up.
Sterling was boosted by optimism that coronavirus restrictions would be eased with strength in global risk conditions also a positive factor with markets looking through near-term weakness. The UK currency strengthened to 34-month highs near 1.3900 against the dollar while the Euro dipped to 9-month lows near 0.8730.
Swiss consumer prices increased 0.1% for January following a 0.1% decline the previous month with the year-on-year rate at -0.5% from -0.8% previously and slightly above consensus forecasts of -0.6%. The National Bank will still be on alert over deflation pressures and maintain negative rates.
The Swiss currency weakened marginally during Friday with the Euro just above the 1.0800 level while the dollar strengthened to 0.8940 before fading. The franc edged lower on Monday amid favourable risk conditions while the dollar traded above 0.8900 with little impact from Draghi being sworn in as Italian Prime Minister.