Risk appetite dipped on Monday amid on-going concerns over expected Fed tightening and higher interest rates.

Risk appetite dipped on Monday amid on-going concerns over expected Fed tightening and higher interest rates. Wall Street equities dipped sharply as confidence continued to ebb with further selling in the tech sector.

US bond yields moved higher on the day with the 10-year yield briefly trading at 22-month highs. US equities rallied strongly from lows which helped calm markets and US yields retreated from highs. Sentiment was still fragile with Asian equities tending to drift lower.

The dollar failed to hold intra-day gains and posted net losses despite Fed expectations. EUR/USD found support below 1.1300 and advanced to near 1.1350 on speculation over an ECB policy shift. Sterling was resilient amid higher yields, but GBP/USD again hit resistance close to 1.3600.

Commodity currencies retreated as equities came under pressure, but rallied from late in Monday.

The Euro-zone Sentix investor confidence index strengthened to 14.9 for January from 13.5 the previous month and above consensus forecasts of 12.0 which suggested that overall confidence in the region was resilient. The Euro was unable to make headway at the European open on Monday with traders doubting that the gains seen on Friday after the US jobs data were justified given a strong underlying report.

Richmond Fed President Barkin stated that he supported the December move towards a more hawkish policy stance and that the labour market is as tight as it could be right now, although he also added that the economy still has longer-term slack. He added that policy normalisation is the correct policy stance and that a March rate hike is conceivable. Markets continued to expect that the Fed would adopt a more aggressive stance and raise rates at least three times this year.

The dollar posted sharp gains at the New York open with EUR/USD dipping below the 1.1300 level. The Euro, however, found support on dips and the dollar was unable to hold gains despite weaker risk conditions. In this environment, EUR/USD rallied from 1.1285 lows to trade around 1.1330 at the European close.

Overall yield spreads limited potential support for the Euro, but there was further speculation that the ECB would look to shift policy in a more hawkish direction.

There was caution ahead of Tuesday’s testimony from Federal Reserve Chair Powell and Wednesday’s CPI inflation data. The dollar will be vulnerable if there is more dovish than expected rhetoric from Powell or a lower-than-expected release for consumer prices.

The Euro held steady on Tuesday and EUR/USD traded around 1.1340 as commodity currencies posted net gains and traders were less confident in selling.

Federal Reserve speculation remained important for market sentiment during Monday. Investment bank Goldman Sachs revised its forecasts and now expects that there will be four interest rate hikes this year compared with three increases expected previously.

US Treasuries retreated further at the New York open with the 10-year yield moving above the 1.80% level for the first time since January 2020. There was, however, a sharp deterioration in risk appetite with heavy losses for US equities amid a fresh round of selling in the tech sector. The yen secured significant defensive support as equities moved lower with strong gains on the crosses and USD/JPY retreated to lows below 115.10, although there was support on approach to 115.00.

Fed Vice-Chair Clarida announced that he was resigning two weeks early on January 14th which had little impact given the consistent hawkish tone from Fed officials.

There were further reservations over coronavirus developments in China as further cities faced restrictions while equities lost ground in Asia as sentiment remained fragile and US yields edged lower. USD/JPY consolidated around 115.15 as narrow ranges prevailed with EUR/JPY around 130.70.

Sterling held a firm tone in early Europe on Monday with a brief GBP/USD move to trade above the 1.3600 level as overall net yields underpinned the UK currency, especially with increased expectations that the Bank of England could sanction a further rate increase at the February meeting.

Sterling failed to sustain the move and dipped as risk appetite deteriorated, but there was a significant element of resilience.

There was further optimism that England could avoid a further tightening of coronavirus restrictions with the strong vaccination booster programme helping to limit the number of serious hospitalisation rates. There were reports that the latest medical evidence to the government was more encouraging which helped underpin sentiment.

GBP/USD settled above 1.3550 with GBP/EUR just above 1.1980. BRC data recorded an increase in like-for-like retail sales of 0.6% in the year to December from 1.8% previously while Barclaycard recorded a 12.2% increase in spending compared with December 2019.

Economic Calendar

10:00German Buba President Weidmann speech
10:20European Central Bank President Lagarde Speaks
12:00USD MBA Mortgage Applications-5.60%

*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.