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Euro-zone industrial production declined 1.6% for December, a steeper decline than the 1.0% expected, with a year-on-year decline at -0.8% from -0.6% previously. The trade surplus widened to EUR29.2bn from EUR25.7bn previously, reinforcing structural Euro support.
The impact from data was limited with markets monitoring forward-looking evidence in the services sector, especially with further reservations over the near-term impact of coronavirus restrictions. Evidence of a decline in German infection rates provided an element of relief.
The dollar overall remained on the defensive with an on-going flow of funds into risk assets which undermined demand in the US currency as commodity currencies posted further gains. The Euro overall was unable to make headway during the day and was capped below 1.2150 against the US currency, although overall sentiment remained firm amid wider US losses as risk conditions dominated.
Overall trading volumes were limited given the US market holiday. Markets were waiting for the US retail sales data on Wednesday amid the on-going debate of US trends after notably weak US data for the December data. There will also be a further debate whether a strong US recovery is likely to strengthen or weaken the US currency. Risk appetite remained robust on Tuesday which continued to provide net support for risk currencies and the dollar remained under pressure. Overall, the Euro stabilised just below the 1.2150 level as the single currency was unable to make significant headway on the crosses.


The US bond yields moved higher during the day which helped underpin the US dollar while the strength in global risk appetite curbed potential demand for the Japanese yen. The dollar posted slight net gains for the day despite wider losses and traded around 105.40 at the European close.
Overall risk appetite remained strong on Tuesday with further gains for equities and a sharp advance for Japan’s Nikkei index. The Chinese yuan continued to gain support and the dollar dipped to 31-month lows close to 6.40 in the offshore market.
There were some reservations over US-China tensions amid reports that China would look to block rare-earth exports to the US, although there was no significant impact on markets as US equity futures continued to push higher.
There were further pledges of strong Japanese monetary and fiscal support which kept the yen on the defensive and there was also speculation over a further covering of long yen positions. The dollar edged to 1-week highs just above 105.50 as US yields moved higher while the Euro strengthened to just above 128.0.


There was further optimism surrounding UK coronavirus developments with the new of new UK infections declining to below 10,000 for the first time since early October. Although there is usually a dip on Mondays the data reinforced expectations of a further underlying easing of infection rates.
The UK vaccination also continued to boost optimism over an early easing of lockdown restrictions even though Prime Minister Johnson continued to preach caution. In this context, there were expectations that the UK would recover earlier than the Euro-zone and narrow the 2020 under-performance gap.
The strength in global risk appetite also continued to provide underlying support during the day with strong gains for the FTSE 100 index boosting expectations that the UK market was securing strong capital inflows from international investors amid a re-rating of the UK economy.
Sterling was able to consolidate just above 1.3900 against the dollar while the Euro weakened to around 0.8720. Overall risk appetite remained strong on Tuesday which continued to provide Sterling support with the UK currency at fresh 34-month highs near 1.3950 against the dollar before a slight correction with the Euro retreating to fresh 8-month lows near 0.8710. Global risk conditions will remain important in the short term.


Swiss sight deposits were unchanged in the latest week at CHF704.3bn which suggested that the National Bank had again not been intervening to weaken the Swiss franc during the week as global recovery hopes lessened the deflation risks.
The Swiss currency was resilient on Monday despite the very solid tone in equity markets and underlying optimism over the global recovery outlook. The Euro settled close to 1.0800 with the dollar around 0.8900. The franc again resisted selling pressure on Tuesday despite robust risk appetite with the dollar just below 0.8900.




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