BoE’s Pill frets over stubborn inflation.
The Euro-Zone Sentix investor confidence index improved to -17.5 for January from -21.0 the previous month and slightly stronger than consensus forecasts of -18.0. Sentix noted that there had been very little change in the current assessment while there was a significant net improvement in the expectations components.
Sentix added, that the end of the restrictive Corona measures in China is generating hopes of better times ahead.
San Francisco Fed President Daly stated that there had been no evidence that core inflation outside housing had shown signs of coming down and that it is too soon to declare victory and stop rate hikes. She added that it was reasonable for rate to increase to 5.25-5.50% and that a hike of 25 or 50 basis points was realistic for the February meeting.
Atlanta head Bostic added that it is likely that services-sector inflation will be stickier than the Fed would want.
Despite relatively hawkish Fed rhetoric, US yields drifted lower with the 10-year yield edging below 3.55% while markets are pricing in over a 75% chance that the February rate increase will be held to 0.25%.
The dollar recovered slightly from intra-day lows after the Fed commentary, but still posted further net losses on the day as yields edged lower and there was a lack of defensive demand for the US currency amid solid risk appetite.
The dollar index dipped to 7-month lows amid expectations that slower inflation would trigger a Fed pivot.
Bank of England chief economist Pill stated that domestic factors could make UK inflation more persistent with risks from high natural gas prices, adverse labour supply developments and bottlenecks in the goods sector.
He added that the risk of second-round inflation effects remain, although he also noted that supply disruptions appear to have eased.
The headline Norwegian inflation rate retreated to 5.9% from 6.5% and below expectations of 6.1%, but the core rate edged higher to 5.8% from 5.7%.
Dollar remains on the defensive. The Euro was unable to gain support from the Sentix business confidence data. There was, however, solid Euro buying on dips as lower gas prices provided strong net support. On-going expectations of a slowdown in inflation undermined the dollar.
EUR/USD poste fresh gains to 7-month highs around 1.0760. Hawkish Fed rhetoric had only limited impact, but the dollar recovered from intra-day lows. EUR/USD settled around 1.0730 on Tuesday.
Lower US yields continued to support the yen. USD/JPY slipped to lows below 131.50 from highs above 132.50. USD/JPY advanced back above 132.00 on Tuesday.
The Swiss franc was unable to gain any traction as risk appetite held firm. EUR/CHF settled just below 0.9900 with USD/CHF just above 0.9200 from 0.9165 lows.
BoE rhetoric had limited Sterling impact while firm risk conditions provided underlying support. GBP/USD posted further strong gains to 2-week highs just above 1.2200 before a retreat to near 1.2150 on Tuesday.
Commodity currencies posted gains, but retreated from intra-day highs. AUD/USD posted 4-month highs at 0.6950 before correcting and traded around 0.6900 on Tuesday. USD/CAD dipped to 6-week lows around 1.3360 before a correction to 1.3390.
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