Sterling overall edged lower amid the less confident risk appetite, but GBP/USD traded above 1.3700.
US producer prices data had only a limited impact, but there was a barrage of hawkish rhetoric from Federal Reserve officials. US bond yields edged lower despite expectations of a series of rate hikes.
Risk appetite dipped during the New York session with unease over monetary tightening. Wall Street indices moved lower with fresh selling in the tech sector. Asian markets also lost ground on reservations over Chinese coronavirus trends.
The dollar stabilised but remained close to 2-month lows on Friday with USD/JPY below 114.00 amid Wall Street reservations. EUR/USD traded around 1.1465 on Friday and close to 2-month highs. Sterling overall edged lower amid the less confident risk appetite, but GBP/USD traded above 1.3700. Commodity currencies retreated from intra-day highs as equity markets lost ground.
The dollar remained under pressure in early Europe on Thursday with EUR/USD advancing to highs near 1.1480.
ECB Vice-President de Guindos stated that inflation will not be as transitory as expected some months ago and the inflation risk is moderately on the upside. Nevertheless, he also forecast that inflation in 2023 and 2024 will be back below 2% and overall inflation pressures were under control.
Philadelphia Fed President Harker stated that he favoured starting to shrink the balance sheet from late this year or early next year which had some impact in dampening expectations of a more aggressive Fed stance, although he also backed an interest rate increase at the March policy meeting.
Richmond head Barkin stated that policy normalisation will need to be pursued more aggressively if inflation remains high and widespread.
Chicago Fed President Evans commented that demand for goods has exploded while services demand has weakened. In this context, inflation is too high and his forecast is aligned with three rate hikes in 2022. The dollar managed to stabilise late in Europe with EUR/USD settling around 1.1460.
Hawkish Fed rhetoric continued with San Francisco head Daly stating that it would be quite reasonable to raise rates in March while Governor Waller stated that three or four rate hikes are a good baseline position for 2022 and that the balance sheet could start to be reduced around mid-year.
The latest US retail sales data will be released on Friday with expectations that sales will be unchanged, although there has been some speculation that there will be a weaker than expected release and decline in sales for the month. There will be a risk of an erratic release on seasonal grounds which may trigger a choppy market reaction. The dollar was close to 2-month lows on Friday with EUR/USD around 1.1465.
US initial jobless claims increased to 230,000 in the latest week from 207,000 and above consensus forecasts of 200,000, but continuing claims declined to 1.56mn from 1.75mn which suggested that there was still strong demand for labour.
Producer prices increased 0.2% for December with the year-on-year rate remaining at 9.7% and marginally below 9.8%. Underlying prices increased 8.3% over the year compared with expectations of 8.0%. Underlying concerns over inflation trends persisted in markets. US Treasuries edged higher after the US open with a limited decline in bond yields which capped potential dollar support. The yen was resilient on the crosses and USD/JPY was held below 114.50.
Equities retreated into the European close with USD/JPY sliding to test the 114.00 level.
China posted a record trade surplus for December and 2021 as exports posted a strong performance while import growth missed forecasts.
Asian equity markets overall were on the defensive and the dollar weakened further with USD/JPY around 113.75 in early Europe on Friday with EUR/JPY around 130.50.
There was further evidence of a tight UK labour market which will inevitably be an important focus for the Bank of England. Sterling held a firm tone in Europe on Thursday, although there was GBP/USD resistance close to 1.3750 and a limited correction as the US currency looked to stabilise after a series of losses.
Sterling was hampered to some extent by concerns over a squeeze on real incomes, especially given the impact of higher energy prices with a huge increase in household energy bills scheduled to come into effect from April 1st even if the government takes action to ameliorate the pain. GBP/USD again failed to hold 1.3750 and lost ground as the US currency stabilised with a weaker tone surrounding risk appetite also curbing support while GBP/EUR below 1.1970.
There was little change on Friday with. UK GDP increased 0.9% for November, above expectations of 0.4% and the industrial data also beat expectations, although the market reaction was muted with GBP/USD around 1.3725 as optimism that coronavirus restrictions would be eased helped to underpin confidence.
|07:00||GBP Industrial Production (Y/Y)(NOV, 2021)||0.50%||0.20%|
|07:00||GBP Industrial Production (M/M)(DEC, 2021)||0.20%||-0.50%|
|07:00||GBP Manufacturing Production (M/M)(NOV, 2021)||0.20%||0.10%|
|07:00||GBP Manufacturing Production (Y/Y)(NOV, 2021)||-0.30%||1.10%|
|07:00||GBP Trade Balance(DEC, 2021)||-14.20B||-11.81B|
|07:00||GBP Trade Balance Non EU(DEC, 2021)||-6.83B|
|10:00||Euro-Zone Trade Balance(NOV, 2021)||3.6B|
|13:30||USD Advance Retail Sales (M/M)(DEC, 2021)||0.30%|
|13:30||USD Core Retail Sales (M/M)(DEC, 2021)||0.30%|
|13:30||USD Export Price Index (M/M)(DEC, 2021)||1|
|13:30||USD Import Price Index (M/M)(DEC, 2021)||0.70%|
|13:30||European Central Bank President Lagarde Speaks|
|14:15||USD Industrial Production(DEC, 2021)||0.50%|
|15:00||USD Michigan Consumer Sentiment(JAN 01)||74.2|
|16:00||FOMC member John C. Williams speech|