Fed minutes were relatively hawkish which triggered increased expectations of an early rate hike in March.

Risk conditions were relatively calm in European trading on Wednesday. Fed minutes were relatively hawkish which triggered increased expectations of an early rate hike in March. US bond yields moves higher with the 10-year yield at the highest level since March 2021.

Risk appetite deteriorated sharply, especially with reservations over Chinese coronavirus developments. Wall Street equities posted significant losses with sharp selling in the tech sector. Asian bourses also lost ground during Thursday, although Chinese stocks were resilient.

The dollar reversed losses after the Fed minutes, although gains were limited against low-yield units. EUR/USD settled just below 1.1300 with an element of defensive Euro support. Sterling posted a firm overall tone despite weaker risk conditions with GBP/USD holding above 1.3500 after touching 8-week highs.

Commodity currencies retreated sharply after the Fed minutes and remained vulnerable on Thursday with sharp losses.

The Euro-zone services index was revised down to 53.1 for the final reading from the flash reading of 53.3 with both the Italian and Spanish readings below expectations, although both were in comfortable expansion territory while the German sector remained in contraction.

ECB council member Kazaks stated that an interest rate increase was possible in early 2023 and that the central bank is ready to cut policy stimulus if necessary.

The dollar was unable to gain traction into the New York open with a reluctance to sell the Euro as EUR/USD edged above 1.1300.

ADP reported an increase in private-sector payrolls of 807,000 for December from a revised 505,000 the previous month. The increase was more than double consensus forecasts of 400,000 and the strongest reading for seven months. The data boosted confidence in the labour market ahead of Friday’s employment report.

The dollar secured only brief support from the stronger than expected jobs data and dipped lower after the Wall Street open.

European equity markets out-performed US markets which provided an element of Euro support and EUR/USD advanced to near 1.1350.

Minutes from December’s Federal Reserve meeting indicated that inflation concerns had increased. Most participants also considered that prerequisites for a rate hike could be met relatively soon if the recent pace of labour-market improvement continued. There was still a wide range of views and some members considered that structural deflation pressures could return. The overall tone was, however, hawkish and there was a shift in money markets with futures pricing in an 80% chance of a rate hike at the March meeting.

The dollar posted gains following the minutes with EUR/USD dipping towards 1.1300. Commodity currencies remained on the defensive on Thursday amid less confident risk conditions. The Euro was able to demonstrate some resilience, but EUR/USD traded just below the 1.1300 level.

According to media reports, the Bank of Japan will revise up its inflation forecast for the coming fiscal year. There were still expectations that the Bank of Japan would maintain a very expansionary monetary policy which limited any potential yen support.

US Treasuries lost ground following the US jobs data with higher yields providing an element of dollar support, although USD/JPY was held below 116.00 against the yen while the Japanese currency lost ground on the crosses. Wall Street equities dipped sharply following the minutes as risk appetite deteriorated while there was a further increase in the 10-year bond yield to the highest level since March and USD/JPY edged back above 116.00 amid wider gains.

The Chinese Caixin PMI services index strengthened to 53.1 from 52.1 previously and above expectations, but the positive impact was offset by reservations over coronavirus developments within China. Risk appetite remained vulnerable in Asia with some yen support, although Chinese equities were resilient. The Bank of Japan made substantial cash injections during the session to combat a spike in yields and USD/JPY traded around 115.90 with EUR/JPY just below 131.0.

Sterling held a firm tone into Wednesday’s New York open with underlying support from higher money-market yields while risk conditions were little changed.

Prime Minister Johnson confirmed that there would be tightening of coronavirus restrictions in England and no need for further lockdown measures. There was an element of optimism that high immunity levels through infections and vaccination boosters would help curb the spike in cases. In this environment, there was speculation that the UK economy could out-perform the Euro-zone. There were further gains for UK equities which helped underpin Sterling confidence during the day.

Sterling retreated against the dollar after the Fed minutes, especially with a slide in risk appetite, but it held a firm overall tone. There was a further net retreat on Thursday as risk appetite remained vulnerable, although GBP/USD did hold above 1.3500 with GBP/EUR around 1.1995

Economic Calendar

07:00German Factory Orders (M/M)(NOV, 2021)2.10%-5.80%
09:30GBP PMI Composite(DEC 01, 2021)53.2
09:30GBP PMI Services(DEC)53.2
10:00Euro-Zone PPI (M/M)(NOV, 2021)5.40%
10:00Euro-Zone PPI (Y/Y)(NOV, 2021)21.90%
13:00Germany CPI (M/M)(DEC)-0.20%
13:00Germany CPI (Y/Y)(DEC, 2021)5.20%
13:00Germany Harmonised CPI (M/M)(DEC, 2021)0.30%
13:00Germany Harmonised CPI (Y/Y)(DEC, 2021)6.00%
13:30USD Trade Balance(NOV, 2021)-68.50B-67.10B
13:30CAD Trade Balance(NOV, 2021)2.09B
13:30USD Initial Jobless Claims198K
13:30USD Continuing Jobless Claims1716K
14:00USD ISM Non-Manufacturing PMI(NOV, 2021)66.7
15:00USD Factory Orders(NOV, 2021)1.00%

*All rates shown are indicative of interbank rates and should only be used for indication purposes only. It is important to note that foreign exchange rates fluctuate and that rates may vary depending on the amount and the base currency that is purchased or sold. Rates are correct as of 8:00am UK time. CentralFX are not responsible for the rates shown.