EUR / USD
The German IFO business confidence index strengthened to a 5-month high of 92.4 for February from a revised 90.3 the previous month and above consensus forecasts of 90.5. The current assessment strengthened to 90.6 from 89.2 while there was a stronger increase in the expectations component to 94.2 from 91.5 previously. IFO economist Wohlrabe stated that the economy is looking towards an upswing, especially in the industrial sector while production plans have been revised significantly higher which underpinned confidence surrounding the German economy.
There were reports that the Italian ban on regional movement would be extended until March 27th, maintaining some reservations over Euro-zone developments
The Chicago Fed national activity index strengthened slightly to 0.66 for January from 0.52 previously, although markets remained focussed on yields.
ECB President Lagarde stated that the bank was closely monitoring the evolution of longer-term yields and that the bank remained committed to preserving favourable financing conditions over the pandemic period. Council member Villeroy stated that there no risk of economic overheating. The comments triggered some speculation that the bank would look to exert some kind of yield curve control, although there was little impact on the Euro.
The dollar attempted to stabilise, but gradually lost ground, especially with renewed gains in commodity currencies and the Euro moved higher to just above 1.2150 at the European close. The dollar was unable to regain ground on Tuesday and retreated to 6-week lows as the Euro traded at 4-week highs around 1.2170.
US yields held firm in early Europe on Monday, but gradually retreated later in the day which limited support for the US currency. The yen was able to gain renewed demand on the crosses and the dollar dipped to lows near 105.00 after the New York open amid a wider slide in US sentiment.
The US currency was unable to recover ground into the European close and continued to test the 105.00 area as wider US currency moves dominated.
Markets will be monitoring Fed Chair Powell’s testimony closely on Tuesday with a focus on monetary and fiscal policy. In particular, there will be a focus on any shift in the rhetoric surrounding the potential for early tapering. Trends in yields will remain a key element for dollar direction.
In comments on Tuesday, Chinese state media stated that the economic recovery would pave the way for monetary policy normalisation. Higher interest rates would tend to support the Chinese yuan and curb potential dollar demand, although equity markets could also be undermined.
US equity futures posted gains on Tuesday which dampened yen demand to some extent and the dollar recovered slightly to around 105.15.
Sterling was subjected to a correction in early Europe on Monday with a dip below the 1.4000 level against the US dollar. Underlying sentiment held firm during the day with expectations of further capital inflows into the UK. In this context, the UK currency found strong support on dips and posted net gains into the New York open.
Prime Minister Johnson laid out the roadmap for easing coronavirus lockdown restrictions and stated that the aim was to end all restrictions in England before the end of June. The UK currency secured a further lift following the outline with highs near 1.4080 against the dollar and the Euro retreated to fresh 11-month lows around 0.8635.
Bank of England MPC member Vlieghe stated that the level of interest rate similar to those before the financial crisis may not be seen in his lifetime. He also indicated that the transmission mechanism of negative rates might be larger in FX markets in the UK case. There was no currency impact and Sterling held a firm tone on Tuesday with the UK currency at fresh 34-month highs just above 1.4080 while the Euro remained just below the 0.8650 level.
UK unemployment increased to 5.1% from 5.0%, in line with expectations with a decline in the claimant count and slow recovery in weekly hours. The UK currency held steady after the data to trade at 1.4070 against the dollar amid pressure for at least a limited correction after a run of very strong gains during the month.
Swiss sight deposits increased marginally to CHF704.4bn from CHF704.3bn previously which suggested the National Bank had not been acting to weaken the franc.
The Swiss franc moved significantly lower in early Europe with the Euro strengthening to above the 1.0900 level. The franc regained some ground later in the day as global yields edged lower again. After briefly moving above the 0.9000 level, the dollar dipped to lows at 0.8950, although there was buying interest on dips. The franc was marginally weaker on Tuesday with the Euro settling around 1.0900 while the dollar was held just above the 0.8950 level.