EUR / USD
After dipping into the European open on Friday, the Euro was able to find support close to Thursday’s lows and edged higher into the New York open amid speculation that the ECB would have to take a more hawkish stance on interest rates while the dollar was unable to gain further traction.
The US University of Michigan consumer confidence index dipped to 61.7 for February from 67.2 the previous month and well below consensus forecasts of 67.5. The current conditions component declined to 68.5 from 72.0 with a significant drop in the expectations index.
Inflation expectations remained a significant focus. The 1-year inflation expectations index edged higher to 5.0% from 4.9% with the 5-year figure unchanged at 3.1%.
Federal Reserve policies remained a key focus during the day. San Francisco Fed President Daly stated that a 50-basis-point rate hike was not her preference for the March meeting and there were also reports that, in private, other Fed officials had stressed the importance of a gradual approach to monetary policy.
The dollar overall edged weaker after the US open as commodity currencies posted net gains, although the Euro was held just above the 1.1400 level.
The Euro dipped sharply late in the day with a move to below 1.1350 amid increased fears over the Ukraine situation following reports that an invasion was imminent. The Ukraine situation remained a key focus in Europe on Monday with the Euro trading just below 1.1350 as diplomatic efforts continued.
The dollar held steady into Friday’s New York open, although it was unable to make any headway and ranges remained relatively narrow. After the spike higher on Thursday, there was slight moderation in the 2-year yield with a retreat to 1.55% from above 1.60% while the 10-year yield also edged lower. Wall Street equities managed to edge into positive territory which limited the potential for defensive yen demand. Overall, the dollar edged lower to the 115.90 area at the European close.
Risk appetite, however, dipped rapidly late in the US session following reports that Russia would invade Ukraine within days. Wall Street equities moved sharply lower while US bond yields declined and there was strong demand for defensive assets. In this environment, the yen posted strong gains against all major crosses and the dollar slumped to lows near 115.00 against the Japanese currency before recovering slightly.
San Francisco Fed President Daly stated that being too aggressive with rate hikes could be destabilising which again curbed market expectations surrounding Fed policy slightly. The Bank of Japan was committed to holding the 10-year bond yield below 0.25% with unlimited bond purchases if needed which curbed potential yen buying and risk appetite attempted to stabilise during the Asian session, but tensions remained high. The dollar consolidated around 115.40 with the Euro close to 131.00.
There was little overall reaction to the batch of UK data releases with mixed GDP data seen as having limited impact on the outlook and Bank England. There were some reservations that the economy would be hampered by pressures on consumer spending due to tax increases and jump in energy prices. The NIESR estimated that GDP increased 0.3% for January following the December decline of 0.2% which would give annual growth of 9.7% given the sharp contraction in January 2021.
Global equity markets were resilient initially which limited the scope for Sterling selling, especially with commodity currencies posting net gains on the day. Sterling advanced to the 1.3600 area against the dollar as UK money-market yields remained elevated.
The mood changed rapidly late in the US session as Ukraine fears triggered a slide in equities. The Euro posted significant net losses with a break below the 0.8400 level and dipped further to 0.8370 as the single currency posted sharp losses while the UK currency retreated to near 1.3550 against the dollar.
CFTC data recorded a further decline in short, non-commercial Sterling positions to 8,500 contracts from 23,600 the previous week, limiting the scope for further short covering. Sterling traded below 1.3550 against the dollar on Monday and was again broadly resilient given fragile risk conditions.
Swiss consumer prices increased 0.2% in January, slightly above expectations of 0.1% with the year-on-year rate at 1.6% and marginally above consensus forecasts of 1.5%. There was limited impact, but with expectations that there would be scope for the franc to appreciate in nominal terms over the medium term.
The Swiss franc posted sharp gains as Ukraine fears intensified and demand for safe-haven assets increased rapidly. The Euro dipped to below 1.0500 against the franc while the dollar was held below 0.9250. The franc held firm on Monday with the dollar trading just above 0.9250.