EUR / USD
Eurozone industrial production increased 2.3% for November with a year-on-year decline of 1.5%. ECB council member Villeroy stated that we are very near to the peak in inflation, although markets remained unconvinced over the central bank commentary on inflation. There was little impact from the data with caution prevailing ahead of the US inflation data while speculation over a shift in ECB policies this year continued to curb potential Euro selling.
US consumer prices increased 0.5% for December and marginally above consensus forecasts. The year-on-year inflation rate increased to 7.0% from 6.8% which was in line with expectations and the highest figure since 1982. Energy prices declined slightly on the month with a 29.3% increase over the year.
Underlying prices increased 0.6% on the month compared with expectations of 0.5% with the year-on-year rate increasing to 5.5% from 4.9%. This was slightly above market expectations of 5.4% and the highest rate since 1991. Used car and truck prices increased 3.5% on the month with a 37.3% annual increase while apparel prices increased 5.8% over the year. Although the data overall was marginally above consensus forecasts, the dollar failed to gain any traction and selling pressure gradually increased into the European close. The Euro strengthened to 8-week highs near 1.1440 as commodity currencies also posted strong gains.
The Fed’s Beige Book reported a modest expansion of activity across all districts while growth expectations moderated slightly. There was some evidence that bottlenecks were easing, but there was still strong upward pressure on wages as labour markets remained very tight. The dollar was unable to regain ground on Thursday and retreated to fresh 2-month lows with the Euro around 1.1440 in early Europe as commodity currencies held firm.
The increase in Chinese new loans slowed to CNY1130bn for December from CNY1270bn the previous month and below market expectations. The total increase in social financing also slowed to CNY2370bn from CNY2610bn in November with markets continuing to monitor domestic coronavirus developments.
Although the US inflation data overall was slightly above market expectations, US Treasuries rallied after the data with the 10-year yield retreating to around 1.73%. There was a muted reaction in equities and the dollar initially retreated to near 115.00 against the yen.
Cleveland Fed President Mester stated that the case for removal of accommodation is very compelling, maintaining expectations of a March rate increase, but the dollar failed to gain support. A break below the 115.00 level-triggered further dollar selling with a slide towards 114.50 before the pair stabilised.
Rhetoric from regional Fed officials remained hawkish with San Francisco head Daly commenting that she definitely sees a rate hike in March while Philadelphia President Harker stated that 7% inflation is very bad and that he would be open to more than three rate hikes this year if required.
Asian equities were unable to make headway as Tokyo raised its coronavirus alert level and the dollar traded just above 114.50 with the Euro just above 131.0.
Sterling held a firm tone in early Europe on Wednesday but was unable to secure further traction. There was speculation that higher yields have already been priced in and markets were also monitoring political developments closely with Prime Minister remaining under pressure as he was forced to apologise in the House of Commons.
International developments dominated during the day and overall global risk appetite held firm during the day with strong advances in oil and commodity currencies helping to underpin Sterling sentiment. Sterling pushed to fresh 2-month highs against the dollar after the US inflation data with a move to test 1.3700, but the UK currency was unable to make further headway against the Euro as the single currency traded around 0.8350.
Markets will continue to monitor political developments, although yield and risk trends are likely to dominate. Overall sentiment held firm on Thursday with Sterling just above 1.3700 while the Euro traded just below 0.8350. Markets will be monitoring Bank of England rhetoric very closely in the short term ahead of February’s meeting.
The Swiss franc has tended to be under pressure in 2022, but the currency regained ground on Wednesday. Although there are expectations of higher nominal US rates, real rates will remain highly negative and the franc also gained some support from expectations that the currency will continue to be an important inflation hedge over the longer term. The Euro retreated to around 1.0450 while the dollar posted sharp losses to near 0.9130 at the European close.
The Euro edged higher to 1.0460 on Thursday with the dollar around 0.9145 as global developments remained a key influence.