IMF forecasts UK GDP contraction.

Spanish inflation data recorded a small increase in the year-on-year rate to 5.8% from 5.7% the previous month and well above consensus forecasts of 4.9%.

The stronger than expected data triggered some fresh concerns over Euro-zone inflation trends and also sparked speculation that the ECB would need to maintain a hawkish policy stance.

German inflation data was scheduled to be released on Tuesday but has been delayed until next week. The Euro-Zone data will go ahead on Wednesday with an estimate for the German data and the release will be important for ECB expectations.

German GDP was reported as a contraction of 0.2% for the fourth quarter of 2022 and compared with expectations of no change.

Annual growth was held to 0.5% from 1.3% previously and the data triggered fresh speculation that the German economy could register a technical recession.

The dollar secured net gains on Monday with an element of support on month-end positioning with the more defensive tone in risk appetite also underpinning the US currency during the day.

China’s PMI manufacturing index recovered to 50.1 for January from 47.0 and in line with consensus forecasts while the non-manufacturing index recovered strongly to 54.4 from 41.6 and above expectations of 52.0. There were also reports that state banks are offering cheap loans to spur consumption. The data failed to trigger a recovery in risk conditions.

In its latest report, the IMF forecast that UK GDP would contract 0.6% in 2023 which would be the worst performance of major economies as the UK fails to benefit from a less pessimistic global outlook.

There will be month-end position adjustment on Tuesday, especially around the London fix, although the impact has tended to be less pronounced over the past few months.

The Euro gained support from the Spanish inflation data on Monday. EUR/USD, however, was again unable to hold above the 1.0900 level and lost ground after the Wall Street open. Weaker equities provided an element of defensive dollar demand. EUR/USD dipped to below 1.0850 later in US trading and was held just below 1.0850 on Tuesday.

Higher US yields undermined the yen. USD/JPY posted highs above 130.50 before consolidating. USD/JPY edged lower to 130.25 on Tuesday amid further speculation over a change in the Bank of Japan mandate.

The Swiss franc lost ground despite a further decline in sight deposits. EUR/CHF advanced to 1.0040 with net USD/CHF gains to just above 0.9250.

Sterling overall was hampered by a less confident tone in equities. The IMF forecasted that the UK would post negative GDP growth for 2023. GBP/USD failed to hold above 1.2400 and retreated to below 1.2350.

Commodity currencies lost ground as equities moved lower and the US dollar advanced. AUD/USD dipped to 0.7060 with a further retreat to 0.7030 on Tuesday after a weak domestic retail sales report. USD/CAD advanced to 1.3385 as lower oil prices also sapped support and the pair traded above 1.3400 on Tuesday at around 1.3420.