EUR / USD
The Euro drifted lower ahead of Friday’s New York open with a retreat to near 1.1270 against the dollar amid inevitable caution ahead of the latest US inflation data
US consumer prices increased 0.8% for November after a 0.9% increase the previous month and marginally above consensus forecasts of 0.7%. The year-on-year rate increased to a fresh 29-year high of 6.8% from 6.2% and met expectations. Food prices increased 6.1% over the year while gasoline prices increased over 58%.
Core prices increased 0.5% which met expectations and the year-on-year also met market expectations with an increase to 4.9% from 4.6%. Used car and truck prices increased 31.4% over the year while the increase in shelter prices was held to 3.8%.
Although the data was broadly in line with expectations, there had been some concerns that the headline data would push above the 7.0% level. In this context, there was a slight element of relief and position adjustment with the dollar losing some ground into the New York close. Overall, the Euro recovered to above the 1.1300 level.
CFTC data recorded a net decline in short Euro positions to just below 10,000 contracts. The Euro edged lower to around 1.1285 on Monday with the Federal Reserve still expected to adopt a hawkish tone this week, although relatively narrow ranges prevailed given the increased element of uncertainty.
The dollar posted net gains ahead of the New York open with expectations of a strong US CPI release. US Treasuries rallied after the US CPI inflation data with the 10-year yield retreating to below 1.48%. The dollar dipped from highs around 113.75 before the data to retreat to just below 113.50.
The University of Michigan consumer confidence index strengthened to 70.4 for December from 67.4 previously and above consensus forecasts of 67.1. There was a small improvement in current conditions and a larger recovery in the expectations component while the 1-year inflation expectations index was unchanged at 4.9%.
The dollar was unable to regain ground later in the session and consolidated around 113.40 despite further gains on Wall Street.
CFTC data recorded no change in yen positioning for the latest week, maintaining the potential for a squeeze and yen gains if US yields decline further.
The Japanese fourth-quarter Tankan business confidence index was unchanged at 18 for manufacturing while there was little change in services amid reservations over Omicron developments. Overall risk conditions were little changed in Asia with a high degree of uncertainty over the outlook for the global economy and asset prices, especially given reservations over the Chinese outlook. The dollar held just above 113.50 against the yen with the Euro around 128.20.
Sterling was resilient in early Europe on Friday despite the generally weaker than expected data and a significant miss for the GDP release. The UK currency was again able to find support below the 1.3200 level against the dollar and traded just above this level.
The UK consumer inflation expectations survey recorded an increase in the 1-year expectations rate to 3.2% from 2.7% in August while the longer-term expectations index edged higher to 3.1% from 3.0%. There was a further downgrading of expectations surrounding a Bank of England rate increase at this week’s policy meeting with money markets pricing out the potential for a rate increase given uncertainty triggered by the Omicron variant.
A UK government spokesman stated that some progress had been made on the Northern Ireland protocol, although the market was focussed elsewhere.
Overall, Sterling posted a net advance to 1.3270 against the dollar with the Euro retreating to 0.8520.
CFTC data recorded no significant change in the latest week with funds continuing to hold a substantial short Sterling position. The UK currency dipped sharply at the Asian open following Prime Minister Johnson’s
declaration of an Omicron emergency. The move to intensify booster vaccinations helped curb potential selling pressure to some extent with hopes that damage would be contained, but Sterling drifted lower again to trade around 1.3230 against the dollar in early Europe.
The Swiss franc held a firm tone during Friday with markets continuing to see the currency as a long-term hard currency. The Euro edged lower to 1.0415 against the franc while the dollar secured a limited net retreat to 0.9210 amid a wider retreat following the inflation data.
There will be caution ahead of Thursday’s National Bank policy decision and the latest data on sight deposits will also be monitored closely to assess whether the bank has been intervening. There was little change on Monday with the dollar securing a tentative recovery to the 0.9225 area amid a firmer US currency.