EUR / USD
The Euro-zone Sentix investor confidence index strengthened to 14.9 for January from 13.5 the previous month and above consensus forecasts of 12.0 which suggested that overall confidence in the region was resilient. The Euro was unable to make headway at the European open on Monday with traders doubting that the gains seen on Friday after the US jobs data were justified given a strong underlying report.
Richmond Fed President Barkin stated that he supported the December move towards a more hawkish policy stance and that the labour market is as tight as it could be right now, although he also added that the economy still has longer-term slack. He added that policy normalisation is the correct policy stance and that a March rate hike is conceivable. Markets continued to expect that the Fed would adopt a more aggressive stance and raise rates at least three times this year.
The dollar posted sharp gains at the New York open with the Euro dipping below the 1.1300 level. The Euro, however, found support on dips and the dollar was unable to hold gains despite weaker risk conditions. In this environment, the Euro rallied from 1.1285 lows to trade around 1.1330 at the European close.
Overall yield spreads limited potential support for the Euro, but there was further speculation that the ECB would look to shift policy in a more hawkish direction.
There was caution ahead of Tuesday’s testimony from Federal Reserve Chair Powell and Wednesday’s CPI inflation data. The dollar will be vulnerable if there is more dovish than expected rhetoric from Powell or a lower than expected release for consumer prices.
The Euro held steady on Tuesday and traded around 1.1340 against the dollar as commodity currencies posted net gains and traders were less confident in selling.
JPY
Federal Reserve speculation remained important for market sentiment during Monday. Investment bank Goldman Sachs revised its forecasts and now expects that there will be four interest rate hikes this year compared with three increases expected previously.
US Treasuries retreated further at the New York open with the 10-year yield moving above the 1.80% level. There was, however, a sharp deterioration in risk appetite with heavy losses for US equities amid a fresh round of selling in the tech sector. The yen secured significant defensive support as equities moved lower with strong gains on the crosses and the dollar retreated to lows at 115.20 despite gains elsewhere, although there was support on approach to 115.00.
Fed Vice-Chair Clarida announced that he was resigning two weeks early on January 14th which had little impact given the consistent hawkish tone from Fed officials.
There were further reservations over coronavirus developments in China as further cities faced restrictions while equities lost ground in Asia as sentiment remained fragile and US yields edged lower. The dollar consolidated around 115.15 against the yen as narrow ranges prevailed with the Euro around 130.70.
GBP
Sterling held a firm tone in early Europe on Monday with a brief move to trade above the 1.3600 level against the dollar as overall net yields underpinned the UK currency, especially with increased expectations that the Bank of England could sanction a further rate increase at the February meeting.
Sterling failed to sustain the move and dipped as risk appetite deteriorated, but there was a significant element of resilience.
There was further optimism that England could avoid a further tightening of coronavirus restrictions with the strong vaccination booster programme helping to limit the number of serious hospitalisation rates. There were reports that the latest medical evidence to the government was more encouraging which helped underpin sentiment.
Sterling settled above 1.3550 against the dollar with the Euro just above 0.8350.
BRC data recorded an increase in like-for-like retail sales of 0.6% in the year to December from 1.8% previously while Barclaycard recorded a 12.2% increase in spending compared with December 2019. Sterling held a firm tone on Tuesday and again tested 1.3600 against the dollar with the Euro around 0.8345.
CHF
Overall Swiss sight deposits increased to CHF724.6bn in the latest week from CHF722.8bn the previous week which suggested that the National Bank had increased intervention to restrain the franc in the first few sessions of 2022 which curbed potential currency support.
Overall yield trends undermined the Swiss currency with the franc unable to make headway despite weaker risk conditions and the slide in equities. The Euro advanced to highs just below 1.0500 while the dollar secured a net advance to 0.9260. The franc nudged weaker on Tuesday with the Euro again testing 1.0500.
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