EUR / USD
Euro-zone retail sales slumped 5.9% for January compared with consensus forecasts of a 1.1% retreat with an annual decline of 6.4%. Markets had been prepared for weak data following the very weak release from Germany. The unemployment rate was unchanged at 8.1% for January, below expectations of 8.3%.
The Euro was unable to gain any traction in European trading and drifted lower as the US dollar held a firm tone.
US initial jobless claims increased slightly to 745,000 in the latest week from a revised 736,000 the previous week, although this was slightly below consensus forecasts. Continuing claims declined to 4.30mn from 4.42mn and marginally below expectations and there was a sharp decline in the number of people receiving pandemic emergency relief with the number of people claiming under all programmes declining to near 18.0mn from 19.0mn previously, although the year-ago figure was 2.2mn.
Challenger data also recorded a decline in monthly lay-offs to 34,500 from 79,600 previously with a 39% annual decline.
The claims data helped underpin expectations surrounding Friday’s employment data with markets expecting a payrolls increase of around 200,000.
The dollar was held in relatively narrow ranges amid caution ahead of comments from Fed Chair Powell. Powell stated that there was a lot of ground to cover to reach maximum employment. He also stated that a decline in the unemployment rate to 4% would not represent full employment and it was highly unlikely that the target would be reached this year. Powell also commented that the Fed would be concerned by disorderly conditions in financial markets and a tightening of conditions in the bond market. The Fed Chair, however, did not issue a stronger warning against higher yields and commodity currencies retreated sharply as equities moved lower.
The dollar weakened briefly after the comments before regaining ground with markets disappointed that there was a more forceful push back against bond-market losses. The Euro dipped below 1.2000 which triggered further selling and the dollar overall posted 3-month highs on Friday with the Euro just above 1.1950.
The dollar maintained a firm tone against the yen on Thursday, especially with the Japanese currency under wider selling pressure. Confidence in a global recovery remained strong which contributed to significant selling pressure on defensive currencies with the yen losing support. In this environment, the dollar moved above 107.50 in Europe. The IIF estimated that the dollar overall is overvalued by 11.7% with notable under-valuation for the Chinese yuan.
The dollar gained further support after Powell’s comments with fresh highs above 107.90 against the US currency. The Senate voted to begin debate on the $1.9trn fiscal stimulus plan with the voting along party lines, but there is liable to be a prolonged debate, limiting the chances of quick approval.
The Chinese yuan maintained a weaker tone amid a firmer US dollar tone with markets monitoring the annual meeting of parliament for comments on a growth target. The dollar overall maintained a strong tone with the US currency at fresh 7-month highs near 108.25 as the yen failed to derive support from fragile equity markets.
The UK PMI construction-sector index strengthened to 53.3 for February from 49.2 the previous month and above consensus forecasts of 51.0. There was strong upward pressure on costs with the fastest rate of increase for 12 years with companies also facing further difficulties surrounding supply chains.
Sterling overall maintained a firm tone into the New York open with expectations of further capital inflows. Although there were reservations over planned tax increases, markets there was optimism that the fiscal stance would underpin a strong near-term recovery and investment incentives could drive capital inflows.
The UK currency strengthened to near 1.4000 at the European close while the Euro weakened to lows just below 0.8600. Sterling also posted notable gains against the yen and Swiss franc, but there was a sharp rejection from 1.4000 against the dollar with a slide to below 1.3900 as the dollar rallied. The pound overall held firm on Friday, but it was held below 1.3900 against the dollar while the UK currency was close to 34-month highs against the yen.
There was a further erosion of demand for defensive currencies during Thursday with sharp losses for the Swiss franc as well as the Japanese yen. With global bond yields moving higher, there was notable demand for higher-yield assets and a flow of funds out of short-term franc deposits, especially with Swiss rates at -0.75%.
The Euro moved above 1.1100 level with 19-month highs around 1.1140 at the European close. The single retreated from its best levels amid wider losses and equity-market losses, but the dollar posted 7-month highs close to 0.9300 before trading just below this level on Friday.