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EUR / USD

 

Talks between the Ukraine and Russian foreign ministers made no headway on Thursday with aggressive rhetoric from Russia’s Lavrov hampering risk appetite.

The ECB held interest rates at 0.0% following the latest council meeting. As planned, the central bank will end emergency bond purchases this month, but there was a change in the planned APP bond purchases with a faster taper for the second quarter. Third-quarter purchases will depend on market conditions at the time while the bank is then planning to stop purchases if the data indicates that the medium-term inflation outlook will not weaken. This was a significant shift and more hawkish stance compared with the previous meeting. The bank reiterated that any adjustments in interest rates would take place sometime after the ending of bond purchases.

The Euro spiked higher after the decision with the statement more hawkish than expected and markets brought forward their expected timing of a rate increase. Markets priced in 43 basis points of tightening by the end of 2022 from 30 basis points ahead of the meeting despite the ECB insistence on a flexible stance.

The central bank lowered its GDP growth forecasts for 2022 while the HICP inflation forecast was revised sharply higher to 5.1% from 3.2% previously.

Bank President Lagarde stated that inflation was likely to stabilise around 2% despite further upward pressure in the near term. She added that risks to the economic outlook are now tilted to the downside. The combination of lower growth and higher inflation forecasts sapped Euro confidence amid stagflation fears.

There was some relief in energy markets after Russian President Putin stated that energy obligations would be met, but the country will cut fertiliser exports. The Euro weakened to below the 1.1000 level and consolidated close to 1.1000 on Friday with risk appetite likely to be cautious ahead of the weekend.

 

JPY

 

US consumer prices increased 0.8% for February, in line with consensus forecasts with the year-on-year rate increasing to 7.9% from 7.5%. This was also in line with expectations and the highest rate for 40 years.  Energy prices increased 25.6% over the year with a 43.6% surge in fuel oil while food prices increased 7.9% over the year. Underlying prices increased 0.5% on the month with the annual rate also meeting expectations at 6.4% from 6.0% in January. There was a small decline in used vehicle prices for the month, but a 41% annual increase with a strong increase in transport services for the month.

Initial jobless claims increased to 227,000 in the latest week from a revised 216,000 the previous week with continuing claims increasing to 1.49mn from 1.46mn.

Although the data was in line with expectations, US Treasuries lost ground following the US data with markets uneasy over the underlying inflation outlook, especially with the Ukraine conflict putting upward pressure on global prices. The US 10-year yield hit 2.00% for the first time in over two weeks, although the dollar was able to secure only a limited initial advance to 116.20 highs before consolidation around 116.00 with some yen resilience.

The yen did post sharp losses on Friday as yield trends dominated with the dollar posting a 5-year high around 116.75 while the Euro also strengthened to 128.40.

 

GBP

 

There were no significant UK data releases on Thursday with risk trends having an important impact. Equity markets lost ground again during the day which limited potential support for the UK currency and overall Sterling confidence tended to deteriorate on global and domestic economic grounds.

From a longer-term perspective, there were further concerns surrounding the UK economic outlook, especially with further warnings over the cost of living crisis.

Sterling was unable to make headway against the dollar and eventually retreated as the dollar regained ground. With Sterling unable to make headway, it dipped to 16-month lows around 1.3070 against the dollar while the Euro overall settled little changed just below the 0.8400 level.  

UK GDP data for January was stronger than expected with a 0.8% increase compared with expectations of 0.1% with industrial production and construction data also both stronger than expected. Sterling edged higher to 1.3100 against the dollar, but there were concerns over the outlook which limited potential support.

 

CHF

 

The Euro briefly hit the 1.0300 level against the franc on Thursday after the more hawkish than expected ECB policy statement, but the Swiss franc resisted further overall selling pressure and the Euro retreated to below 1.0250 at the European close. The dollar was unable to hold above the 0.9300 level.

The Swiss currency continued to gain some underlying support from underlying Ukraine fears, especially given the renewed slide in equity markets, but yield trends hurt the franc as US yields moved higher. The dollar edged just above the 0.9300 level on Friday as yield trends sapped potential Swiss support.

 

Technical Levels

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