EUR/USD posted solid gains to near 1.1250 on speculation of a less dovish ECB stance.
Risk appetite held firm on Monday despite expectations of underlying central bank monetary tightening.
Month-end position adjustment was a significant element during the day. US bond yields overall edged lower which helped calm nerves.
Wall Street indices posted another strong advance amid month-end position adjustment. Asian bourses edged higher as Chinese markets remained closed.
The US dollar posed significant losses despite expectations of month-end buying. EUR/USD posted solid gains to near 1.1250 on speculation of a less dovish ECB stance. Sterling failed to hold intra-day highs with GBP/EUR dipped from 23-month highs.
Commodity currencies posted net gains as the US dollar faded. The Australian dollar corrected weaker as the Reserve Bank pushed back against rate hikes, but with buying on dips.
Euro-zone GDP increased 0.3% for the fourth quarter which was in line with consensus forecasts with annual growth at 4.6% and marginally below market expectations.
German consumer prices increased 0.4% for January compared with consensus forecasts of a 0.3% decline. The annual rate was at 4.9% from 5.3% previously, but well above expectations of 4.3%, reinforcing expectations that the Bundesbank would push for a tighter monetary policy.
The data also triggered a fresh round of speculation that the ECB would adopt a more restrictive policy over the next few months with money markets pricing in an increase of 10 basis points by September despite previous insistence from the ECB that it would not raise rates this year.
The increase in money markets was significant in providing Euro support and the single currency posted net gains into the New York open.
The Chicago PMI manufacturing index strengthened to 65.2 for January from 64.3 the previous month and above consensus forecasts of 61.7. The Dallas Fed manufacturing index retreated to an 8-month low of 16.6 from 26.0 previously.
Month-end position adjustment was a significant factor towards the European close with the dollar remaining on the defensive against all major currencies. Commodity currencies secured net gains with EUR/USD strengthening to above the 1.1200 level, extending the advance to 1.1230 late in US trading.
The dollar was unable to regain ground on Tuesday with EUR/USD trading around 1.1240 despite weaker than expected German retail sales data.
There was choppy trading in US Treasuries during Monday with yields initially moving higher before a reversal and slight net decline into the European close with the 10-year yield around 1.78% which limited potential dollar support.
San Francisco Fed President Daly stated that an increase in interest rates was likely as early as March. Following his comments over the weekend, Atlanta Fed President Bostic stated that a 0.50% rate hike at the March meeting is not the preferred policy action.
Equities reversed losses to post net gains which stifled support for the Japanese yen to some extent, but USD/JPY dipped to test support below 115.00 amid wider losses before rallying slightly as overall yield spreads continued to provide net backing for the US currency.
Japan’s PMI manufacturing index was revised to 55.4 for January from the flash reading of 54.6 and the highest reading for close to 8 years while there were some government concerns over the impact of a weak yen. Chinese markets remained closed for the New-Year holidays which dampened activity with regional equities posting limited gains. Volatility eased with USD/JPY trading close to the 115.00 level in early Europe with EUR/JPY around 129.25.
Sterling posted net gains on Monday but failed to hold intra-day highs with notably choppy trading during the day. There were further expectations that the Bank of England would raise interest rates this week which helped underpin sentiment and triggered a potential covering of short Sterling positions.
The interim publication of the Gray report had some impact in curbing potential support for the UK currency, although the overall impact was limited with no immediate move to oust Prime Minister Johnson by Conservative MPs. There was optimism that the impact of Omicron would fade as overall infection rates edge lower which provided some support.
Month-end position adjustment was a significant factor after the New York open. From highs just above 1.3450, there was a GBP/USD retreat to 1.3425 while GBP/EUR found support close to 23-month highs near 1.2040 and dipped to near 1.1970.
The UK currency was little changed on Tuesday and GBP/USD traded close to 1.3450 as the US currency overall remained on the defensive.
|07:00||EUR German Retail Sales (Y/Y)(DEC, 2021)||1.10%||0.50%|
|07:00||EUR German Retail Sales (M/M)(DEC, 2021)||-1.40%||0.80%|
|07:00||GBP Nationwide House Prices (Y/Y)(JAN)||10.80%||10.40%|
|07:00||GBP Nationwide House Prices (M/M)(JAN)||0.60%||1.00%|
|07:30||CHF Retail Sales (Y/Y)(DEC, 2021)||5.80%|
|08:00||SECO Consumer Climate||8|
|08:45||Markit/ADACI Mfg PMI(JAN)||62.7|
|08:50||Markit Mfg PMI(FEB)|
|08:55||EUR German Manufacturing PMI (M/M)(JAN)||57.9|
|09:00||Euro-Zone PMI Manufacturing(JAN)||58||58|
|09:30||GBP Consumer Credit(DEC, 2021)||1.233B|
|09:30||GBP Mortgage Approvals(JAN)||67.00K|
|10:00||Euro-Zone Unemployment Rate(DEC, 2021)||7.20%|
|14:30||CAD RBC Manufacturing PMI(JAN)||56.5|
|14:45||USD Manufacturing PMI(JAN)||57.8|
|15:00||US Manufacturing ISM(M/M)(JAN)||58.7|
|15:00||USD Construction Spending (M/M)(DEC, 2021)||0.40%|
|15:00||USD JOLTs Job Openings(DEC, 2021)||10.562M|
|21:45||NZD Unemployment Rate||3.90%||3.40%|