EUR / USD
The Euro held firm into Thursday’s New York open as the dollar tended to drift lower. ECB minutes from January’s meeting stated that the projected path of inflation continued to be distant from the council’s medium-term aim and that ample monetary stimulus remained essential. The council also reiterated that a temporary inflation boost should not be mistaken as sustainable, but there were some positive aspects with favourable financing conditions expected to prevail for some time.
US initial jobless claims increased to 861,000 in the latest week with last week’s total revised sharply higher to 848,000 from the initial report of 793,000 and well above consensus forecasts of 770,000. Continuing claims declined to 4.49mn from 4.56mn, although this was also above market expectations. There was a decline in pandemic emergency assistance of 1.3mn for the week, but the data triggered reservations over the labour market trends.
Housing starts declined to 1.58mn for the January from a revised 1.68mn the previous month and slightly below consensus forecasts, although building permits surged to 1.88mn, the highest reading since June 2006. The Philly Fed manufacturing index declined slightly to 23.1 for February from 26.5 the previous month, although above consensus forecasts of 20.5. There was also a slight slowdown in the rate of new orders growth while employment increased at a slightly stronger rate. Pries paid increased sharply, but the increase in prices received moderated, easing inflation fears slightly.
Euro-zone consumer confidence improved slightly to -14.8 for February from -15.5 previously. The retreated after the claims data, although there was choppy trading as the currency attempted to recover at times. Overall, the dollar edged lower with the Euro just below 1.2100 and the dollar was unable to regain ground on Friday.
There were reports that the Bank of Japan may revamp its guidance on ETF purchases as part of the March policy review, but the currency market impact was limited.
US yields initially held firm at the New York open despite the higher than expected data for jobless claims, but there was gradual erosion later in the session. Wall Street equities also lost ground which limited the scope for further yen selling. The dollar drifted lower to the 105.60 area as wider losses sapped support.
Japan’s PMI manufacturing index edged higher to 50.6 for February from 49.8 previously and the first expansion since April 2019 with the services sector retreating slightly to 45.8 from 46.1. The Japanese 10-year bond yield increased to the highest level since November 2018.
Treasury Secretary Yellen stated that a big stimulus package was still needed to address economic pain within the economy.
The Chinese yuan recovered some ground on Friday with markets monitoring US-China relations. In particular, the G7 comments will be watched closely later in the day and could have an impact on risk conditions. US futures edged lower in Asia and the dollar regained ground to trade around 105.65 against the yen from 105.55 lows.
Bank of England external MPC member Saunders expressed notable concerns over the labour market with comments that unemployment rate had already increased sharply and was expected to increase further once the furlough scheme comes to an end. He also noted concerns over the economic recovery and scarring risks. Nevertheless, he downplayed the potential for negative interest rates and stated that no decision needed to be made at this time.
Given that Saunders has had a very dovish slant over the past few months, the rhetoric provided an element of Sterling support. Overall confidence in the UK currency also remained strong amid vaccine optimism with fresh 34-month highs near 1.4000 against the dollar. The Euro also retreated to 11-month lows below 0.8650.
The UK GfK consumer confidence index improved to a 10-month high of -23 from -28 previously. Retail sales, however, declined 8.2% for January after a 0.3% gain the previous month and well below expectations of a 3.0% fall. The government borrowing data was much lower than expected at £8.8bn for January. Sterling edged lower after the retail sales data, although the impact was notably muted as it traded around 1.3970 against the dollar with the Euro just above 0.8650.
The Swiss franc lost ground on Thursday despite the slightly less buoyant risk conditions. Overall expectations of a global recovery continued to undermine potential defensive demand for the Swiss currency, especially with weaker demand for gold.
A research paper suggested the National Bank should target a 2% inflation rate to ease deflation risks and weaken the currency to achieve the target.
The Euro advanced to 1.0835 while the dollar posted limited losses to the 0.8965 area and the Euro also posted a slight advance on Friday.