EUR / USD
The German ZEW economic sentiment index strengthened to a 5-month high of 71.2 for February from 61.8 the previous month and above consensus forecasts of 59.6. There was, however, a slight decline in the current conditions index to -67.2 from -66.4 previously. The wider euro-zone index strengthened to 69.6 from 58.3 previously.
The dollar posted 3-week lows ahead of the New York open as underlying US sentiment remained weak and markets continued to chase reflationary trades including commodity currencies. In this environment, the Euro edged above 1.2150 as the dollar remained on the defensive.
The New York Empire manufacturing survey strengthened to 12.1 for February from 3.5 previously and above consensus forecasts of 6.2. There was stronger growth in new orders for the month and unfilled orders also posted an increase. Employment continued to increase on the month and there was a sharp increase in prices for the month, reinforcing expectations of a wider increase in inflation as bond-market trends remained important.
The dollar was able to regain some ground following the data and gained additional traction as Wall Street opened. Mixed data has triggered uncertainty over the US outlook and Wednesday’s retail sales data will be important for sentiment with a significant rebound expected for January.
St Louis Fed President Bullard stated that financial conditions were generally good and that inflation was likely to rise this year which is something that the central bank would take into account. The comments triggered some fresh speculation that the Fed could shift to a less accommodative policy later this year.
San Francisco head Daly stated that pressure on inflation was still downward, although markets remained pre-occupied with the inflation threat. There was a sharp dip in gold prices and the dollar also recovered strongly with a Euro retreat to just below 1.2100. The dollar held a firmer tone on Wednesday with the Euro around 1.2075.
The dollar dipped lower ahead of the New York open with wider losses pushing the currency to lows just below 105.20. There was evidence of buying on dips and the dollar secured fresh support amid a renewed increase in bond yields with the 10-year yield at 12-month highs above 1.25% while the 30-year yield moved above 2.00%.
Kansas City Fed President George stated that the single-family housing sector was very strong and this strength is expected to continue for some time. The yen overall remained on the defensive amid further short covering and the dollar strengthened sharply to four-month highs close to the 106.00 level just after the European close.
Japan’s monthly Tankan index strengthened to a 19-month high of 3 for February from -1 previously while pessimism in the services sector eased slightly. Exports increased 6.4% in the year to January, although this was slightly below consensus forecasts and imports decline 9.5%. Core machinery orders increased 5.2% for December compared with expectations of a 6.0% decline. Increased confidence in the outlook had little market impact.
US yields edged lower on Wednesday which curbed further yen selling and the dollar settled close to 106.00 from 5-month highs of 106.20 with the Euro around 128.00.
Sterling maintained a firm tone on Tuesday with further support from confidence that the UK vaccination programme would allow an easing of coronavirus restrictions and help deliver a strong economic recovery. The positive tone was amplified by robust risk appetite and strong demand for reflation trades which helped underpin the UK currency. Sterling pushed to fresh 34-month highs just above 1.3950 as the dollar remained on the defensive.
There was an increase in volatility in US trading as the US currency recovered ground on higher yields. Sterling dipped sharply to lows near 1.3870 against the dollar, but there was still strong support on dips and a recovery back above 1.3900 while the Euro retreated to 9-month lows just below the 0.8700 level.
The headline UK CPI inflation rate increased to 0.7% for January from 0.6% previously and marginally above expectations with the core rate unchanged at 1.4%. Sterling was held below 1.3900 against the firmer dollar as demand for risk assets also faded slightly while the Euro was held around 0.8700.
The Swiss currency was broadly resilient during Tuesday despite robust risk conditions and a shift in global investment trends. The Euro was held in tight ranges, eventually settling just above 1.0800 while the dollar recovered to highs near 0.8930 before fading again.
Precious metals declined on higher bond yields and the Japanese yen also declined, but there was no significant franc selling. The Swiss currency was little changed on Wednesday with the dollar around 0.8935 as markets continued to monitor global inflation trends.