EUR / USD
German retail sales data was much weaker than expected with a 4.5% slide for January to give an annual decline of 8.7%, reinforcing concerns over near-term spending trends. The latest unemployment data was also weaker than consensus forecasts with an increase of 9,000 for February following a 37,000 decline the previous month. Germany did announce a very limited easing of coronavirus restrictions from next week. The headline Euro-zone inflation rate was unchanged at 0.9% for February and in line with expectations. The core rate declined to 1.1% from 1.4% and below consensus forecasts of 1.4% with little net impact.
The Euro dipped to below the 1.2000 level, but there was support below this level and the break was recovered quickly with the Euro recovering ground.
The dollar overall continued to lose ground in early New York with significant gains in commodity currencies. There was also evidence of strong dollar selling into the London fix and the Euro moved above 1.2050 as the dollar lost ground on the major crosses.
Fed Governor Brainard stated that the central bank would remain patient on monetary policy and was focussed on realised progress towards inflation and employment goals. She reiterated that monetary accommodation should not be removed when unemployment declines to near estimates of a neutral rate and she would be concerned if there was a disorderly increase in bond yields. There was no overt move to push back against higher yields and the dollar attempted to stabilise.
San Francisco Fed President Daly stated that any inflation spike will be short-lived with a full job-market recovery to take at least a year or two after the US is fully vaccinated. Dovish Fed rhetoric undermined the US currency with the Euro peaking around 1.2090 and the dollar was unable to recover ground on Wednesday.
The dollar was unable to make a challenge on the 107.00 level against the yen in early Europe on Tuesday and gradually lost ground amid wider losses.
The US New York PMI index retreated to 35.5 for February from 51.2 the previous month. There was, however, an increase in the IBD consumer confidence index to 55.4 from 51.9 previously, maintaining expectations of firmer consumer spending. US bond yields overall were also marginally lower on the day which sapped dollar support as markets continued to monitor risk trends. The yen, however, was unable to secure sustained support, especially with a renewed move back into reflation trades. In this environment, the dollar settled around 106.70 as the Japanese currency lost ground on the crosses.
China’s Caixin PMI services index edged lower to 51.5 from 52.0 previously and in line with consensus forecasts, although overall business confidence held firm. Wall Street futures posted net gains in the Asian session which curbed potential yen demand and the dollar edged higher to the 106.85 area with the Euro above 129.0.
The latest data indicated that German exports to the UK declined 30% in January compared with January 2020 with a notable impact from Brexit. It will take many months for distortions surrounding trade data to unwind. Nationwide reported a faster rate of growth in UK house prices, but there was little market reaction.
Sterling lost ground in early Europe and retreated to 2-week lows, but there was support above 1.3850 against the dollar and the UK currency gradually recovered ground as the US currency lost traction with overall Sterling sentiment holding firm.
The UK currency was underpinned by a more stable tone surrounding risk appetite and demand for reflation trades. There was, however, an underlying lack of momentum amid speculation that pressure to boost Sterling weightings had been completed. There was also an element of caution ahead of Wednesday’s UK budget.
As the dollar lost ground, Sterling pushed to highs around 1.3975 at the European close while the Euro eventually settled unchanged just below 0.8650. Overnight reports indicated that the furlough scheme would be extended further than expected until the end of September which had some impact in dampening confidence in the potential UK recovery. Sterling retreated slightly to around 1.3950 against the dollar with the Euro posting a limited advance to near 0.8660.
The Swiss franc held steady in early Europe on Tuesday, but gradually lost ground amid more stable risk conditions and fresh selling pressure on low-yield assets with Swiss rates at -0.75%. The Euro strengthened to highs just above 1.1050 despite expectations of a dovish ECB stance.
The dollar did post-four-month highs, but was unable to make a serious challenge on the 0.9200 level and retreated to just below 0.9150 amid wider losses.
The Euro held just above 1.1050 on Wednesday with the dollar close to 0.9150 as overall risk conditions held steady.