BoE’s Mann warns over sticky inflation.

There was a further easing of concerns surrounding the banking sector on Wednesday. Risk assets were generally in demand with a dip in demand for the yen.

There were significant net gains for equity markets during Wednesday as risk appetite recovered. Markets will be wary over position adjustment ahead of the end of the first quarter.

The dollar remained under some pressure against European currencies as risk appetite recovered on Wednesday.

The US currency fought back on corporate month-end dollar demand and posted significant gains against the yen and commodity currencies.

The latest US EIA inventory data recorded a 7.5mn barrel draw for the week compared with expectations of a marginal build, although the API had already reported a substantial draw. Gasoline also recorded a 2.9mn barrel draw.

Bank of England Monetary Policy Committee Mann stated that it will be difficult for central banks to set monetary policy during the second half of the year as they are likely to face a sharp decline in headline inflation, but sticky core inflation. This will increase pressure for banks to cut rates, but they will want to see that inflation is squashed before doing so.

The latest German inflation data is due on Thursday. Consensus forecasts are for the headline rate to decline sharply to 7.3% from 8.7% due to a favourable base effect.

The latest Chinese PMI data will be released on Friday and will be important for expectations surrounding the Chinese and global outlook. Expectations are for solid expansion, but slightly weaker data than last month.

The Euro held a firm tone after Wednesday open with further expectations of a hawkish ECB stance. EUR/USD posted highs around 1.0870. The dollar regained some ground on corporate buying and EUR/USD retreated to 1.0830 with little net change on Thursday.

The yen was undermined by stronger risk appetite. Year-end portfolio adjustments triggered further volatility. USD/JPY posted gains to highs around 132.85 before a retreat to 132.50.

The Swiss franc recovered some ground despite a weak investor survey. EUR/CHF retreated to 0.9960 and USD/CHF settled around 0.9200 with limited net support.

Sterling overall held firm amid solid risk conditions. GBP/USD hit 7-week highs at 1.2360 before a correction.

Commodity currencies were hampered by a US dollar rebound. AUD/USD was unable to hold above 0.7700 and retreated to 0.6680 before edging back above 0.6700 on Thursday. USD/CAD, however, dipped below the 1.3600 level and settled around 1.3575 before a further retreat to 1.3550 on Thursday.

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