EUR / USD
On Friday, the German economy Ministry stated that ongoing supply bottlenecks are likely to persist for a while, but also insisted that the upward trend in inflation would weaken noticeably from January. ECB President Lagarde stated that monetary accommodation is still needed for inflation to settle around 2% over the medium term.
US retail sales declined 1.9% for December following a revised 0.2% increase the previous month and much weaker than consensus forecasts of a 0.1% decline. Underlying sales declined 2.3% for the month while the control group recorded a 3.1% decline following a revised 0.5% retreat in December.
The University of Michigan consumer confidence index retreated to 68.8 for January from 70.6 previously and slightly below consensus forecasts to 70.0. There was a net decline in the current conditions index and sharper retreat in the expectations index. The one-year inflation expectations edged higher to 4.9% from 4.8% with an increase in the 5-year index to 4.9% from 4.8% as markets continued to focus on inflation.
The Euro initially failed to make further headway and the dollar posted significant gains during the US session despite the much weaker than expected sales data. Commodity currencies retreated and the Euro dipped to lows around 1.1410. CFTC data recorded a switch to a small net long Euro position in the latest week.
On Sunday, ECB council member Schnabel stated that a premature rate hike could choke an economic recovery. The Euro was little changed and traded around 1.1415 in early Europe on Monday with activity likely to be dampened by a US market holiday as markets assess long-term capital flows.
JPY
US industrial production declined 0.1% for December compared with expectations of a 0.3% increase. US Treasuries briefly strengthened following the US data, but failed to hold the gains. From lows just below 113.50 after the US retail sales data, the dollar rallied to near 114.00 amid wider gains.
New York Fed President Williams stated that the central bank is approaching a decision to raise interest rates while the timing of hikes will be based on a wide range of data. The Federal Reserve will now be in a blackout period ahead of the January 26th policy meeting with markets assuming that there will be signal at that meeting of an interest rate hike at the March meeting. CFTC data recorded a sharp increase in short yen contracts to over 87,000 in the latest week from 53,000 previously which suggests that funds have been caught out and forced to liquidate as the dollar dipped sharply.
Chinese GDP increased 4.0% in the year to the fourth quarter of 2021 and above consensus forecasts of 3.3%. Industrial production was also above expectations, but retail sales growth was well below expectations at 1.7% from 3.9% previously. The central bank warned over supply-side issues and also nudged interest rates lower with a cut in the medium-term financing rate to 2.85% from 2.95%, the first cut since April 2020. The rate cut helped underpin risk appetite.
US yields were little changed while Asian markets posted net gains and the dollar posted further net gains to near 114.50 with the Euro around 130.65.
GBP
UK Foreign Secretary Truss stated that there had been good talks with EU Commission vice-president Sefcovic and commented that the two sides would intensify talks to resolve post-Brexit issues. There was a slightly more cautious tone from Sefcovic who commented that some issues needed to be taken off the table, although there was also a survey from Northern Ireland which suggested that companies were making headway.
Markets were continuing to monitor UK political developments during the day. Sterling was unable to make further headway against the dollar during Friday and a dip below the 1.3700 level helped trigger further selling after the New York open. The Euro was unable to make any headway and settled below 0.8350.
CFTC data recorded a further net decline in the short Sterling position to near 29,000 contracts from 39,000 previously as short covering continued. Immediate political tensions eased slightly, but Prime Minister Johnson remained under pressure with Sterling around 1.3675 on Monday as the Euro held around 0.8350.
CHF
The Swiss franc was again resilient on Friday with an element of support from less confident equity markets while underlying selling was more subdued. The Euro retreated to near 1.0420 against the Swiss currency while the dollar secured only a limited net advance to 0.9135.
Markets will be monitoring the latest data on sight deposits to help assess whether the National Bank has been intervening more aggressively to curb franc gains.
The franc traded marginally lower on Monday with the dollar around 0.9145 as higher US yields capped potential franc support.
Technical Levels
