EUR / USD
The Euro was held in tight ranges ahead of Wednesday’s New York open with caution ahead of the US inflation data and a lack of conviction over direction.
US consumer prices increased 0.4% for February after a 0.3% increase the previous month and in line with consensus forecasts with the year-on-year rate increasing to a 12-month high of 1.7% from 1.4%. Underlying prices increased 0.1% on the month compared with market expectations of a 0.2% increase with a slight decline in the year-on-year rate to 1.3% from 1.4%. Core prices were dampened by monthly declines in used cars and clothing prices.
The lower core inflation figure dampened concerns over an increase in inflationary pressure and also curbed expectations that the Fed would have to tighten policy more quickly. The dollar edged lower following the data with the Euro peaking around 1.1925.
There was an element of caution ahead of Thursday’s ECB policy meeting with uncertainty whether the bank would make a more determined effort to curb upward pressure on bond yields. The ECB is not expected to take significant action at this meeting and, although inflation forecasts are likely to be revised higher, sources suggest that this will be seen as a transitory effect. President Lagarde’s comments will be watched closely.
The dollar attempted to recover ground but retreated again later in New York as risk appetite strengthened. With commodity currencies posting gains, the Euro moved back to the 1.1920 area. The dollar remained on the defensive on Thursday and traded at 1-week lows with the Euro edging higher to around 1.1930.
Chinese new loans growth slowed sharply to CNY1360bn for February from CNY3580bn previously, but this reflected the impact of new-year holidays and growth was above consensus forecasts. M2 money supply strengthened to 10.1% from 9.4% previously.
US bond yields edged lower following the US inflation data which undermined dollar demand and the US currency dipped below the 108.50 level to below 108.30.
The 10-year bond auction was relatively well received which helped underpin sentiment and continued to cap bond yields while Wall Street indices posted strong gains.
The $1.9trn economic stimulus package secured final congressional approval and the Administration quickly moved on to a planned $2.5trn infrastructure spending plan for the next four years. US equity indices held solid gains into the market close, limiting potential yen demand.
After two weeks of heavy selling, the latest data indicated that Japanese selling of US Treasuries had eased substantially which also helped cap short-term yields. US equity futures posted further gains and the yen weakened on the main crosses. The dollar strengthened to near 108.75 as the Euro strengthened to 129.65.
Underlying confidence in the UK economic outlook remained strong during Tuesday as the vaccination programme continued to spark optimism over a re-opening of the economy and strong growth from the second quarter. There were some reservations over evidence that there was a higher mortality rate with the UK variant.
The row between the EU and UK over vaccine supplies tended to emphasise that the EU is lagging far behind which tended to support the UK currency in comparison to the Euro area. There were, however, some concerns that the row would cause further delays in ratifying the EU/UK trade deal in the EU parliament.
The UK currency was boosted by benign global risk conditions and gains in equity markets during the day. Sterling pushed back above the 1.3900 level as the dollar stumbled while the Euro settled just above 0.8550 and close to 12-month lows.
The latest GDP and industrial production data will be released at Friday’s European open with consensus forecasts for a GDP contraction of around 5.0% as lockdown measures take effect. The latest RICS housing index was stronger than expected with a headline reading of 52% from 49% previously. Overall risk conditions held firm in early Europe and Sterling traded higher to around 1.3940 against the US dollar while there were 34-month highs around 151.50 against the yen.
After a sharp correction on Tuesday, the Swiss currency was unable to regain further ground during Wednesday and gradually lost traction as underlying selling pressure resumed. Overall risk appetite remained firm which underpinned potential franc demand. There were also further expectations that the National Bank would prefer a weaker Swiss currency. The Euro strengthened to the 1.1080 area while the dollar ended below the 0.9300 level.
Strong equity markets continued to curb franc demand on Thursday with the Euro just below 1.1100 while the dollar traded close to 0.9300.