EUR / USD
The German trade surplus widened to EUR22.2bn for January from EUR16.4bn the previous month with a monthly increase in exports of 1.4% despite a dip in shipments to the UK while imports declined sharply. Overall confidence in the Euro-zone outlook remained fragile. After securing a limited reprieve in early Europe on Tuesday, the Euro was able to recover further ground as the dollar’s grip on currency markets eased with a retreat from 3-month highs..
The US NFIB small business confidence index edged higher to 95.8 for February from 95.0 previously. There was further evidence of a tighter labour market and there was also upward pressure on prices, maintaining the overall focus on inflation trends.
The Euro pushed to highs above 1.1900 against the dollar as commodity currencies also secured a recovery, but the single currency was unable to maintain the more positive tone as underlying sentiment remained cautious amid the underlying shift in yield spreads.
There was an element of caution ahead of Wednesday’s US consumer prices data with headline prices forecast to increase 0.4% on the month to give a 1.7% annual increase with the core rate expected to remain at 1.4% for the month.
The Euro was also hampered by caution ahead of Thursday’s ECB monetary policy meeting with expectations of relatively dovish rhetoric from bank President Lagarde and a particular focus on whether the bank looks to exert control on longer-term yields. The latest data indicated that the bank had increased PEPP bond-buying in the latest week. The Euro settled just below 1.1900 and retreated to the 1.1875 area on Wednesday as the US currency secured fresh support. There was further choppy trading surrounding commodity currencies with net losses providing an element of US currency support amid sharp swings in sentiment.
After posting highs near 109.25 on Tuesday, the dollar was subjected to a sharp correction in Europe with a dip back below the 109.00 level. US yields moved lower which curbed potential dollar demand and the yen also secured some respite from selling on the main crosses.
Although Wall Street equities posted strong gains, the dollar retreated to lows near 108.50 at the European close. There was also a sharp correction higher in the Swiss franc and gold which contributed to the yen correction.
White House Economic Adviser Ramamurti reiterated that the risks of doing too little to stimulate the economy outweigh the risks of doing too much.
Chinese inflation data had little impact and regional markets posted limited gains, although there was further underlying volatility. Overall yields were little changed with the dollar advancing to the 108.80 area after finding support below the 108.50 level with the Euro trading around 129.20.
Underlying confidence in the UK economic recovery remained strong on Tuesday which continued to provide underlying Sterling support, especially with the vaccine programme still making strong headway. Monday’s commentary from Bank of England Governor Bailey was also seen as relatively optimistic which helped underpinned sentiment. There were, however, cautious remarks from the England chief medical officer as he warned over major dangers if the re-opening plans were accelerated.
Overall, global influences had a greater short-term impact on the UK currency with a boost from renewed strength in equities and a positive tone surrounding risk appetite. Sterling pushed back above 1.3900 against the dollar before fading again while the Euro dipped to 2-week lows at 0.8550.
Trends in bond yields remained important and risk conditions were slightly less confident on Wednesday as choppy trading continued. Sterling retreated to around 1.3850 against the dollar before recovering while the Euro recovered slightly to 0.8570. The UK currency held firm against the Japanese yen and Swiss franc.
Global equity markets made strong headway on Tuesday, but the Swiss currency was able to resist renewed selling pressure during the day. Indeed, there was a sharp corrective recovery for the franc as the Euro dipped to lows around 1.1035 from early highs around 1.1120 while the dollar also posted substantial net losses to 0.9285 at the European close. A rebound in the yen and gold helped trigger fresh support for the Swiss currency.
National Bank member Zurbruegg welcomed the recent franc weakening while stating that negative interest rates and currency market interventions remained necessary. The Euro edged towards the 1.1050 area while the dollar traded around 0.9300 as risk conditions remained a key element.