EUR / USD
The German ZEW economic confidence index strengthened sharply to 51.7 for January from 29.9 the previous month and well above consensus forecasts of 32.0. There was, however, a retreat in the current conditions component to -10.2 from -7.4 previously due to the current coronavirus restrictions.
The Euro was unable to make any headway following the data and edged lower amid a firm US dollar tone and existing yield spreads.
The New York Empire manufacturing index declined sharply to -0.7 for January from 31.9 previously. This was substantially below consensus forecasts of 25.0 and the first negative reading for 19 months. There was also a sharp decline in the new orders index to -5 from 27.1 in December while shipments secured only a marginal increase on the month. Employment increased at a slower pace on the month while inflation pressures eased slightly on the month, even though there were still notable inflation pressures in the data. Companies remained optimistic over the outlook while pricing pressures are expected to intensify.
The dollar failed to retreat and posted strong gains after the Wall Street open. The US currency was boosted by a further increase in yields and strong expectations that the Federal Reserve would tighten more aggressively this year. Commodity currencies lost ground and the Euro slid to near 1.1320 at the European close.
ECB council member Villeroy stated that the central bank would act if inflation proved more persistent and the Euro managed to stabilise on Wednesday to trade around 1.1330 with markets continuing to monitor yield trends amid some speculation that the Fed could raise rates by 0.50% at the March meeting.
Japanese Prime Minister Kishida stated that he wanted to impose states of emergency on several regional from January 21st which hampered risk appetite.
Treasuries were little changed following the US data releases with the 10-year yield holding around 1.83% and close to 2-year highs. There was, however, sharp selling in US equities which underpinned defensive yen demand and the dollar dipped to the 114.50 area against the Japanese currency.
The US NAHB housing index declined marginally to 83 from 84 the previous month, but continued to signal a robust housing sector.
US Treasuries declined later in the session with the 10-year yield at fresh 2-year highs. The dollar, however, failed to gain fresh support, especially with further defensive yen demand as equity markets continued to decline.
US futures posted further losses to 4-week lows on Wednesday and Asian equities posted sharp losses as risk appetite remained more defensive. There was further defensive yen demand with the dollar retreating to 114.25 before a slight recovery while the Euro dipped to lows below 129.50.
Sterling was undermined by more vulnerable risk conditions on Tuesday, especially with equity markets declining sharply with rate increases also priced in.
Expectations that the UK coronavirus restrictions would be released offered some protection to the UK currency during the day with some reports that Plan B restrictions could be scrapped in England from January 26th. Markets also continued to monitor wider political developments as Prime Minister Johnson remained under pressure with reports of a concerted move by Conservative MPs to force a no-confidence vote.
Sterling dipped to lows around 1.3575 against the dollar while the Euro posted renewed net losses to around 0.8335 and close to 23-month lows.
The UK consumer inflation rate increased to 5.4% for December from 5.1% previously, above expectations of 5.2% and the strongest reading since March 1992. The core rate increased to 4.2% from 4.0%, maintaining pressure on the Bank of England to raise interest rates to keep inflation expectations in check.
Markets will also monitor testimony to the Treasury Select Committee from Bank of England Governor Bailey. Reaction to the data was muted with Sterling trading just above 1.3600 against the dollar with the Euro around 0.8330, although overall volatility is likely to remain elevated, especially with elevated political tensions.
The Swiss franc held firm on Tuesday with an element of support from weaker equity markets, especially with a dip in European markets. The franc also gained an element of support from unease over tensions between Russia and Ukraine. In this environment, the Euro retreated to near 1.0400.
The dollar secured net gains to 0.9170 amid the wider advance. The franc posted further gains on Wednesday as the defensive tone surrounding equities continued to provide net support. The Euro dipped below the 1.0400 level while the dollar was held just below 0.9160.