ECB President Lagarde stated that inflation would remain high in the short term.

ECB President Lagarde stated that inflation would remain high in the short term, but still considered that price pressures would subside before higher inflation becomes entrenched, especially with no evidence of excess demand.

She also commented that the central bank needed to maintain flexibility and optionality in the conduct of monetary policy more than ever which will increase the focus on March’s policy meeting. Risks to the economic outlook were described as balanced over the medium term.

The overall rhetoric was slightly less hawkish than expected following last week’s council meeting which helped trigger a Euro correction weaker.

Italian bond yields increased further on Monday with 10-year yields increasing to near 1.85%, the highest reading since April 2020 while the spread over Germany widened to the highest level since July 2020. Widening spreads had some impact in undermining the Euro and will be watched closely by the ECB.

US Treasuries lost ground on Monday and there was a further retreat in futures during the Asian session with the 10-year yield increasing to near 1.95% and the highest level since late 2019. The 2-year yield also increased to around 1.33%, a huge increase compared with 0.73% at the end of 2021. Higher US yields helped support the dollar and also had important ripple effects in global markets.

The NAB Australian business conditions index dipped to 3 for January from 8 the previous month, but here was a rebound in confidence to 3 from -12 previously on optimism over a re-opening of the economy. Former Reserve Bank member Edwards stated that there could be four rate hikes this year.

Trading ranges were narrower as is often the case on the Monday following a US jobs report. The Euro edged lower with pressure for a correction following strong gains last week. Less hawkish rhetoric from bank President Lagarde also undermined Euro support. EUR/USD was unable to hold above 1.1450 and drifted lower to near 1.1400.

Sterling was hampered by doubts that the Bank of England would engage in an extended rate-hike cycle, but GBP/USD did find support below 1.3500.

Commodity currencies recovered some ground. Expectations of border opening underpinned the Australian dollar with AUD/USD above 0.7100. Higher US bond yields supported the dollar and USD/JPY strengthened to 115.50.

EUR/CHF re-tested 3-month highs close to 1.0600 before fading again. High oil prices support the Canadian dollar with USD/CAD below 1.2700.

Economic Calendar

13:30CAD Trade Balance(DEC, 2021)2.03B3.13B
13:30USD Trade Balance(DEC, 2021)-77.10B-80.20B
23:30AUD Westpac Consumer Confidence(FEB)-2.00%

*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.