Sterling was supported by favourable risk conditions..

ECB council member Holzmann stated that he favours multiple rate hikes of 50 basis points at least in the first half of 2023 and that it could take 2-3 years or even longer to bring inflation down to target.

Council member Knot stated that there should be further 50 basis-point hikes in February and March with further hikes in May and June.

Fed Governor Waller stated that some progress had been made on inflation, but there is a considerable way to go towards the 2% target. He added that he favoured a 25 basis-point rate hike at the February meeting followed by additional tightening. He added that he sees encouraging signs of wages moderation, but more evidence of slowing is needed.

He also stated that the Fed will need to keep rates high for longer rather than cut them by the end of the year. He warned that the Fed will need to do a lot more if financial conditions loosen and inflation takes off again, but if the Fed is wrong it will be much easier to cut rates.

Fed Reserve officials will now be in a silent period ahead of next week’s policy decision. Markets will, however, be on alert for any unofficial briefings through the Wall Street journal.

Although the rhetoric was hawkish, Waller’s comments that there would be a shift in stance if inflation declined more than expected helped underpin risk sentiment. Equities moved higher.

The dollar lost ground after Waller’s comments, especially with gains in equity markets undermining potential defensive dollar demand.

The Euro also gained support from hawkish ECB rhetoric and EUR/USD posted fresh 9-month highs above the 1.0900 level.

CFTC data recorded a decline in short, non-commercial yen contracts to 23,000 contracts in the latest week from over 35,000 previously and the smallest short position since March 2021, limiting scope for further short covering.

National Bank Chair Jordan stated that the absolute priority should be to bring inflation down and that the second-round effects of inflation should not be under-estimated.

Chinese markets will be closed all week for the lunar new-year holidays.

The Euro continued to gain an element of support from low gas prices on Friday. EUR/USD found support close to 1.0800. Dollar support was undermined by a lack of defensive support. EUR/USD moved above the 1.0850 level and hit 9-month highs around 1.0925 on Monday before settling just above 1.0900.

USD/JPY was unable to hold gains despite higher US yields and dipped to lows just below 129.50. USD/JPY dipped sharply to lows near 129.00 on Monday before a strong recovery to near 130.00 with EUR/JPY close to 142.00.

Jordan’s hawkish rhetoric failed to underpin the Swiss currency. EUR/CHF strengthened to just above parity with USD/CHF settling around 0.9180 after failing to hold above 0.9200.

Sterling was supported by favourable risk conditions. There were also some hopes for economic improvement later in the year which offset near-term fears. GBP/USD advanced to re-test 1-month highs at 1.2445 as the dollar posted losses before a limited correction.

Commodity currencies posted net gains as risk appetite strengthened. AUD/USD strengthened to 0.6965 and traded around 0.6975 on Monday, but hit resistance close to 0.7000. USD/CAD dipped to 1.3360 lows and traded around 1.3370 on Monday.