EUR / USD
In comments on Friday, ECB council member Rehn stated that an increase in interest rates could come some week or several months after APP bond purchases end, reinforcing that the central bank will want as much flexibility as possible, maintaining uncertainty over policy developments.
Risk appetite was lifted ahead of the US open following reported comments from Russian President Putin that there had been positive undertones in the talks with Ukraine. The Euro moved back above 1.1000, although there was a high degree of scepticism over the rhetoric and the Euro was unable to gain significant traction.
The US University of Michigan consumer confidence index edged lower to 59.7 for February from 62.8 the previous month and below market expectations of 61.4. There was only a marginal decline in the current conditions index, but with a steeper decline in the expectations component. The one-year inflation expectations index increased to 5.4% from 4.9% and the highest reading since late 1981 while the 5-year inflation expectations index held at 3.0%.
The Euro was unable to gain sustained support and retreated to around 1.0950 after the Wall Street open. Fears over a potential Russian use of non-conventional weapons increased later in the day with the Euro sliding to 1.0920 while US yields also moved higher.
The Federal Reserve will be an important focus this week with strong expectations that there will be a 0.25% rate increase while forward guidance will be important.
Yield expectations underpinned the dollar on Monday with the Euro around 1.0920 as the dollar overall maintained a strong tone.
The dollar maintained a strong tone ahead of Friday’s New York open with a move to fresh 5-year highs just above 117.00. Overall risk appetite held firm and the 10-year bond yield held around 2.0% which underpinned the US currency.
Equities, however, dipped lower after the Wall Street open with underlying reservations over risk conditions and the dollar was unable to make further headway with a dip back below 117.00. Goldman Sachs stated that global financial conditions are at the tightest since May 2009 which should provide an element of yen support.
US President Biden stated that the US would revoke permanent normal trade relations with Russia and there were further reservations over global growth trends.
Over the weekend, Chinese coronavirus cases increased further and partial lockdowns in Shanghai and Shenzhen, increased economic reservations.
There was an element of optimism that Ukraine/Russian peace talks were able to make headway while the yen was undermined by expectations that the Bank of Japan would maintain a very dovish stance. Overall, the dollar posted a fresh 5-year high near 117.90 in Asia on Monday before a slight correction.
The latest Bank of England survey on inflation expectations recorded an increase in the 1-year expectations index to 4.3% from 3.2% previously and the highest reading since November 2008. The latest Yougov survey also reported that 5-year expectations matched record highs at 4.1%.
There are strong markets expectations that the Bank of England will sanction a third successive rate increase at this week’s policy meeting, especially given the need to keep inflation expectations in check. The bank will, however, also be very uneasy over the risk of triggering a downturn in the economy.
Sterling was unable to secure any significant traction during Friday with markets still fretting over the threat of deteriorating domestic economic conditions as higher energy prices bite. The UK currency dipped to below 1.3050 against the dollar and to near 1.3000 with the Euro slightly lower around 0.8360.
CFTC data recorded an increase in short Sterling positions to over 12,000 contracts in the latest week with funds generally cautious over the outlook for the economy.
Sterling remained fragile and was held around 1.3025 against the dollar on Monday while the Euro recovered to 0.8385.
The Swiss franc continued to gain an element of support on defensive grounds during Friday, especially with underlying caution over Ukraine developments. The franc was, however, hampered by yield trends with the National Bank seen as lagging any global tightening while there are strong expectations that the Federal Reserve will raise rates multiple times this year. The Euro settled around 1.0220, but the dollar advanced to near 0.9330.
Yield trends continued to hamper the franc on Monday with the dollar securing a further slight advance to fresh 3-month highs around 0.9360.