EUR / USD
The dollar remained under pressure in early Europe on Thursday with the Euro advancing to highs near 1.1480 as the single currency held firm.
ECB Vice-President de Guindos stated that inflation will not be as transitory as expected some months ago and the inflation risk is moderately on the upside. Nevertheless, he also forecast that inflation in 2023 and 2024 will be back below 2% and overall inflation pressures were under control.
Philadelphia Fed President Harker stated that he favoured starting to shrink the balance sheet from late this year or early next year which had some impact in dampening expectations of a more aggressive Fed stance, although he also backed an interest rate increase at the March policy meeting.
Richmond head Barkin stated that policy normalisation will need to be pursued more aggressively if inflation remains high and widespread.
Chicago Fed President Evans commented that demand for goods has exploded while services demand has weakened. In this context, inflation is too high and his forecast is aligned with three rate hikes in 2022. The dollar managed to stabilise late in Europe with the Euro settling around 1.1460.
Hawkish Fed rhetoric continued with San Francisco head Daly stating that it would be quite reasonable to raise rates in March while Governor Waller stated that three or four rate hikes are a good baseline position for 2022 and that the balance sheet could start to be reduced around mid-year.
The latest US retail sales data will be released on Friday with expectations that sales will be unchanged, although there has been some speculation that there will be a weaker than expected release and decline in sales for the month. There will be a risk of an erratic release on seasonal grounds which may trigger a choppy market reaction. The dollar was close to 2-month lows on Friday with the Euro around 1.1465 and position adjustment will be important later in the day.
US initial jobless claims increased to 230,000 in the latest week from 207,000 and above consensus forecasts of 200,000, but continuing claims declined to 1.56mn from 1.75mn which suggested that there was still strong demand for labour within the economy.
Producer prices increased 0.2% for December with the year-on-year rate remaining at 9.7% and marginally below 9.8%. Underlying prices increased 8.3% over the year compared with expectations of 8.0% and underlying concerns over inflation trends persisted in markets. US Treasuries edged higher after the US open with a limited decline in bond yields which capped potential dollar support. The yen was resilient on the crosses and the dollar was held below 114.50.
Equities retreated into the European close with the dollar sliding to test the 114.00 level.
China posted a record trade surplus for December and 2021 as exports posted a strong performance while import growth missed forecasts.
Asian equity markets overall were on the defensive and the dollar weakened further to around 113.75 in early Europe on Friday with the Euro around 130.50.
There was further evidence of a tight UK labour market which will inevitably be an important focus for the Bank of England. Sterling held a firm tone in Europe on Thursday, although there was resistance close to 1.3750 and a limited correction as the US currency looked to stabilise after a series of losses.
Sterling was hampered to some extent by concerns over a squeeze on real incomes, especially given the impact of higher energy prices with a huge increase in household energy bills scheduled to come into effect from April 1st even if the government takes action to ameliorate the pain. Sterling was unable to hold 1.3750 and lost ground as the US currency stabilised with a weaker tone surrounding risk appetite also curbing support while the Euro edged above 0.8350.
There was little change on Friday with. UK GDP increased 0.9% for November, above expectations of 0.4% and the industrial data also beat expectations, although the market reaction was muted with Sterling around 1.3730 against the dollar as optimism that coronavirus restrictions would be eased helped to underpin confidence.
The Swiss franc was able to secure further net support on Thursday with no further selling on yield grounds. The Euro continued to edge lower after a failure to sustain a brief move above 1.0500 earlier this week and posted net losses to below 1.0450. The dollar remained under pressure and dipped to test support below 0.9100.
Risk conditions were also slightly more fragile on Friday which curbed potential franc selling and the dollar edged below 0.9100 on Friday. There will still be caution over the risk of National Bank intervention to weaken the franc with choppy trading likely during the day.