ECB rhetoric stays hawkish.

New York Fed President Williams stated that the central bank still has some work to do to get inflation under control, although there is a lot of uncertainty over the inflation outlook. He also stated that the December dot plots were still very reasonable due to the totality of the data.

He also warned that there will need to be higher interest rates if services prices remain elevated. Williams was broadly optimistic over the economic outlook with demand still very strong.

ECB council member Knot stated that headline inflation seems to have peaked, but his main focus was on underlying inflation. If underlying inflation does not materially abate, the current pace of rate hikes may be needed into May.

He added that the ECB will move to smaller steps once the bank sees a clear and decisive turn in underlying inflation dynamics.

The overall market tone was more defensive on Wednesday with reservations over Fed policy and caution ahead of next week’s CPI inflation data.

The dollar index overall was little changed as it drifted from intra-day highs.

The UK RICS housing data reported that a net 47% of surveyors reported declining house prices for January from 42% previously and the lowest reading since 2009.

Comments from Bank of England Governor Bailey and other MPC members to the Treasury Select Committee will be watched closely on Thursday.

The latest UK GDP data is due on Friday with expectations of 0.3% contraction for December with expectations that fourth-quarter GDP will be unchanged.

The Swedish Riksbank will announce its latest policy decision on Thursday with consensus forecasts of a further 50 basis-point hike to 3.00%.

The Euro held a firm tone in early Europe on Wednesday, but was unable to sustain the gains. The dollar recovered some ground amid a less confident tone surrounding risk appetite as equities retreated. EUR/USD did hold above the 1.0700 level and settled little changed around 1.0730 on Thursday.

Higher yields underpinned the dollar and the yen lost ground. USD/JPY recovered from 130.60 to highs at 131.50 and settled just below this level. Markets remained on alert for government nominations for Bank of Japan appointments.

The Swiss franc held a firm tone amid cautious risk conditions. EUR/CHF retreated to around 0.9875 with USD/CHF close to 0.9200 from 0.9180 lows.

Sterling gained some protection from stronger UK equities and hopes for improved conditions later in 2023. GBP/USD found support below 1.2050 with a further test of resistance around 1.2100.

Commodity currencies lost some ground as the Wall Street stocks moved lower. AUD/USD hit selling close to 0.7000 and dipped to 0.6930 before a tentative recovery to 0.6955 on Thursday. USD/CAD settled around 1.3430 from highs just above 1.3450.

Economic Calendar