Latest US CPI data was benign while Fed Chair Powell maintained a dovish stance.

Latest US CPI data was benign while Fed Chair Powell maintained a dovish stance. This combination continued to underpin overall risk appetite.

Wall Street equities, however, were unable to secure further momentum with slight net losses for global bourses. Activity was stifled by market holidays in several Asian markets including Japan and China.

The dollar moved lower on negative real yields before demonstrating some resilience. EUR/USD held above 1.2100 with selling on approach to 1.2150. Sterling posted net gains amid on-going vaccine optimism with GBP/USD near 1.3850.

The Euro maintained a firm tone into the New York, although the dollar was able to demonstrate some residence as the single currency struggled to extend gains. There were further reservations over the EU vaccine programme as EU Commission President von der Leyen admitted that there were significant difficulties. Germany stated that current lockdown measures would not end until at least March 7th, maintaining reservations over the near-term outlook.

ECB President Lagarde stated that inflation was not converging to the goal over the medium term and that the accommodative monetary policy must continue.

US consumer prices increased 0.3% for January which was in line with expectations, although the year-on-year rate was held at 1.4% compared with consensus forecasts of 1.5%. Energy and clothing prices strengthened sharply on the month, but car sales declined. Core prices were unchanged on the month, below expectations of a 0.2% increase and the annual rate slowed to 1.4% from 1.6% and below forecasts of 1.5%.

The CPI data helped sooth market concerns over the risk of higher inflation and the dollar lost ground with EUR/USD pushing to just above 1.2140 before stalling with little change into the European close with a reluctance to chase the Euro higher despite the weak dollar tone.

Fed Chair Powell reiterated that the current pace of bond buying would continue until substantial further progress had been made towards maximum employment and price stability. He also stated that the US was a long way from full employment and monetary policy would not be tightened solely in response to a strong labour market. Powell repeated that the Fed will aim to achieve moderately above 2.0% for some time.

The overall rhetoric was dovish and broadly in line with recent comments and the dollar reaction was measured with EUR/USD settling around 1.2130. Underlying dollar sentiment remained fragile on Thursday, but it was able to resist further significant selling with EUR/USD little changed.

The dollar looked to pare losses ahead of the New York open, although overall progress was still limited. There were reports that the Bank of Japan would look to strengthen forward guidance at the March meeting and warn that interest rates could be pushed deeper into negative territory. The comments undermined the yen to some extent, especially with speculation that the Finance Ministry would also look to curb further yen gains.

Bond yields moved lower following the US inflation data which curbed potential US currency demand and Wall Street equities also dipped after the open.

Risk conditions were stable following Powell’s comments with USD/JPY around 104.65 as ranges narrowed.

Chinese and Japanese markets were closed on Thursday which limited activity and USD/JPY was held around 104.60 amid the overall soft tone.

Sterling maintained a firm tone during Wednesday with markets continuing to probe resistance areas against the dollar. The UK currency continued to gain underlying support from the vaccination programme as the proportion of the population receiving at least one jab increased to above 18.5%.

The EU stated that it wanted an extension until April 30th to ratify the EU/UK trade deal. There was little net impact, although markets still fretted over evidence of trade difficulties under the new regulations, especially surrounding Northern Ireland, which could have a negative impact on UK growth.

Bank of England Governor Bailey made no comments on monetary policy in his comments as he concentrated on financial regulation and standards.

The RICS house-price index retreated to 50 for January from 63 the previous month and below consensus expectations of 60, reinforcing the trend of a slowdown in the sector. Sterling overall held a firm tone with GBP/USD probing 1.3850 while GBP/EUR rallied slightly to near 1.1415.

Economic Calendar

08:00ECB Luis De Guindos Speaks
12:00Monthly Oil Market Report
13:30USD Initial Jobless Claims757K779K
13:30USD Continuing Jobless Claims4490K4592K

*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.