ECB and BoE decisions Thursday.

The headline Euro-Zone CPI inflation rate declined to 8.5% for January from 9.2% previously and below consensus forecasts of 9.0%.

The underlying rate, however, was unchanged at 5.2% and slightly above expectations of 5.1%.

The ADP employment data recorded an increase in private-sector payrolls of 106,000 for January and well below consensus forecasts of 180,000, although the December increase was revised higher to 253,000 from the original reading of 235,000. There was a significant decline in transport and construction jobs for the month.

The JOLTS data, however, recorded an increase in job openings to 11.00mn for December from a revised 10.44mn previously and well above consensus forecasts of 10.25mn.

The US ISM manufacturing index declined to 47.4 for January from 48.4 the previous month and below consensus forecasts of 48.0. There was a sharper decline in new orders for the month with production also edging lower. There was another small increase in employment for the month while inventories increased slightly.

There was a further decline in prices for the month, although the rate of decline was slower than the previous month.

The Federal Reserve increased interest rates by 0.25% at the latest policy meeting to 4.75% which was in line with consensus forecasts and the vote was unanimous.

According to the statement, inflation has eased somewhat, but remains elevated. The committee also anticipates that further increases will be appropriate, although it will take into account the cumulative tightening and lags associated with monetary policy.

Chair Powell stated that the Fed had come a long way, but there was more work to do on inflation. In this context, it would be very premature to declare victory.

Powell stated that the disinflationary process has started, but only in around 25% of the core PCE. He expects disinflation pressures will expand, but it’s not being seen yet with sticky inflation in services.

Powell suggested that two more rate hikes are potentially needed, but reiterated the high degree of uncertainty and that the Fed is data dependent. According to Powell, if the economy performs as expected there will not be scope for rate cuts this year as he again warned that it would be a major mistake to ease policy too quickly. The situation could, however, change if inflation declines faster than expected.

Although Powell continued to warn over the risk of sticky inflation, his comments that the disinflation process had started tended to dominate and markets were more convinced that interest rates would be cut later this year with peak-rate expectations also lowered slightly.

In this environment, the dollar index posted sharp losses to 9-month lows with EUR/USD also breaking above 1.1000 to a 9-month high.

Wall Street also reacted favourably to Powell’s comments with net gains as yields declined, although the global reaction was muted.

The ECB and Bank of England will both announce their latest policy decisions on Thursday.

Consensus forecasts are for both banks to increase rates by 50 basis points to 3.00% and 4.00% respectively. Policy guidance will be a crucial element for the Euro and Sterling.

The Euro held firm ahead of Wednesday’s US open and posted further gains after the US ADP data. EUR/USD edged above the 1.0900 level. After brief gains, the dollar lost ground during Chair Powell’s press conference. EUR/USD surged to touch the 1.1000 level and posted fresh 9-month highs to 1.1030 in Asia before a correction to near 1.1000.

Lower yields sapped dollar support against the yen. USD/JPY dipped sharply to lows just below 128.60 in New York.

The Bank of Japan continued to resist any policy change. USD/JPY dipped to 128.20 before a recovery to 128.60.

The Swiss franc was influenced primarily by global moves. EUR/CHF recovered to around parity with USD/CHF sliding to 18-mnth lows near 0.9060.

Sterling overall tended to drift lower amid expectations of a dovish Bank of England rate hike. GBP/USD dipped to 1.2275 before a strong recovery after the Fed decision. Firm risk appetite also helped propel GBP/USD to near 1.2400 on Thursday.

Commodity currencies posted strong gains after the Fed press conference. AUD/USD surged above 0.7100 and advanced further to 7-month highs near 0.7160 in Asia before correcting slightly. USD/CAD dipped to 2-month lows just below 1.3270 before stabilising.

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