EUR / USD
The Euro found some support just below 1.1400 against the dollar in early Europe on Tuesday, although it struggled to gain any traction and was held in tight ranges.
Markets continued to monitor ECB rhetoric. Council member de Cos stated that recent inflation data has shown a surprising upwards trend, although there is still a high degree of uncertainty over the outlook and inflation is not likely to remain above 2% over the medium term.
The US NFIB small-business confidence index declined to an 11-month low of 97.1 for January from 98.9 the previous month with only one of the indicators registered a monthly improvement. There was still evidence of a very tight labour market while a number of companies reported that inflation was the biggest problem. In addition, the number of companies increasing selling prices hit the highest level since 1974 which will maintain concerns over underlying inflation trends within the economy.
The US trade deficit widened to $80.7bn for December from $79.3bn the previous month, although this was below consensus forecasts of $83.0bn. For 2021 as a whole, the deficit widened to a record $859bn from $677bn the previous year and was equivalent to 3.7% of GDP.
Markets continued to monitor Italian yield trends closely during the day with concerns that any widening of yield spreads would undermine the Euro-zone outlook. There was also speculation that any further widening of peripheral spreads would prevent aggressive policy action by the ECB, especially given the need to avoid a tightening of financial conditions. Overall, the Euro consolidated close to 1.1420 at the European close as narrow ranges prevailed.
After the European close, ECB Council member Villeroy stated that the market reaction to the ECB may have been too strong which suggests further unease over the market moves seen since last week’s meeting. The Euro held firm on Wednesday and traded around 1.1425 against the dollar as commodity prices posted limited net gains with market concerns over the Ukraine situation also easing slightly. There will be further net caution ahead of Thursday’s US CPI inflation data.
After testing highs above 1.95%, US Treasury futures rallied ahead of the New York open, but there was renewed selling at the New York open with yields again probing multi-month highs. Yields again hit a ceiling close to 1.97% which held the dollar to around 115.55 at the European close. There was caution in Treasury markets ahead of Thursday’s US CPI data with market expectations that the annual rate will increase to 7.3% from 7.0% the previous month.
There was some relief over solid demand at the Treasury 3-year auction with most of the buying from overseas buyers.
San Francisco Fed President Daly stated that she backed a March rate increase and that inflation could get worse before it gets better, although she also noted that the Fed can’t be overly aggressive on rate increases. There will be further debate whether the Fed will sanction a 0.50% rate increase at the March meeting.
Asian equities posted net gains on Wednesday as risk appetite held firm. The dollar touched a 1-month high near 115.65 in Asia but failed to hold above 115.50 as US yields edged lower with the Euro around 131.90 as tight ranges prevailed.
Sterling posted a limited net advance ahead of Tuesday’s New York open with underlying support on yield grounds with expectations that the Bank of England rate hikes would underpin the UK currency as global investors switch funds towards currencies where nominal interest rates are expected to increase over the next few months.
Overall risk conditions held steady during the month with Wall Street indices posting limited net gains into the European close which curbed any potential Sterling selling.
The UK currency settled close to 1.3550 against the dollar while the Euro retreated to around 0.8430 amid a wider Euro retreat.
Markets will be monitoring comments from Bank of England chief economist Pill on Wednesday for further guidance on interest rates with Sterling holding a firm tone in early Europe as global equities made headway. The Uk currency traded just above 1.3550 against the dollar in early Europe with little change against the Euro.
The Swiss franc was able to resist losses in early European trading on Tuesday despite further upward pressure on global bond yields. The increase in Euro-zone yield spreads had some negative impact on the single currency and provided an element of protection for the Swiss currency.
The Euro drifted lower to 1.0560 while the dollar was unable to hold above 0.9250 and settled just below this level. The franc was marginally lower on Wednesday as markets continued to monitor global yield trends and central bank policies, although the dollar traded just below the 0.9250 level.