Sterling continued to gain support from optimism over the vaccine rollout.
There was generally dovish rhetoric from Fed Chair Powell as he ruled out any near-term US policy tightening. Overall risk appetite was supported by global recovery hopes and supportive macro policies. Reaction to Biden’s fiscal stimulus plan was limited and Wall Street equities drifted lower with further strong support priced in.
The dollar made net gains into the New York open, but failed to hold the best levels. EUR/USD dipped to 4-week lows below 1.2120 amid euro-zone reservations before stabilising. Sterling maintained a firm tone amid underlying vaccine hopes with little impact from the GDP data.
Commodity currencies recovered from initial losses, but edged lower again amid the EUR/USD retreat and a lack of traction.
The Euro edged higher in early Europe on Thursday, but was unable to gain significant traction hampered by an on-going covering of short dollar positions.
Minutes from December’s ECB meeting reiterated that bond purchases were a more effective tool that a rate cut during the pandemic. There was further market nervousness over the risk of verbal intervention against Euro strength which tended to encourage a liquidation of positions.
US initial jobless claims increased sharply to 965,000 in the latest week from a downwardly-revised 784,000 the previous week and well above consensus forecasts of 795,000. Continuing claims also increased to 5.27mn from 5.07mn the previous week and above expectations of 5.06mn.
The data triggered fresh concerns over labour-market trends, although there were also expectations that poor data would increase demands for stronger fiscal stimulus.
The Euro overall continued to lose ground in early New York trading with EUR/USD retreating to 5-week lows below 1.2115. The single currency was hampered by fresh reports that Chancellor Merkel wants to tighten German lockdown measures, including the closure of schools.
Fed Chair Powell stated that the central bank would need to see inflation to rise above 2.0% for a time in order for the new inflation framework to be credible to the public and a one-time increase in prices is unlikely to lead to higher inflation. He added that the time to raise interest rates is no-time soon and that now is not the time to be talking about an exit, especially with the central bank far from its goals. There would also be clear communication when it becomes appropriate to discuss specific dates for a tapering of bond purchases.
The dollar dipped on the broadly dovish headline comments, but then recovered ground and EUR/USD settled around 1.2160 late in New York trading. The US currency held steady in early Europe on Friday, but was unable to extend gains with EUR/USD just below 1.2150.
Equity markets were held in tight ranges ahead of the New York open with the dollar unable to make significant headway despite the advance against European currencies. As the dollar lost ground again, there were USD/JPY losses to around 103.70 at the European close.
The dollar dipped after Fed Chair Powell’s initial comments, but recovered some ground as US yields moved higher on the day. Markets were also monitoring fiscal developments during the day ahead of President-elect Biden announcement of his economic stimulus plans.
After the New York close, Biden announced a $1.9trn stimulus package including $1.0trn in direct support for households with wider unemployment benefits and an increase in direct payments to $2,000. The plans had been signalled strongly ahead of release which limited the impact and US bond yields drifted lower following Biden’s comments. There were also some uncertainties whether all the elements in the package would be approved in Congress.
Equity futures dipped lower during the Asian session and USD/JPY settled around 103.80 at the European open with EUR/JPY just below the 126.0 level.
Sterling continued to gain net support from optimism over the vaccine rollout, especially with further evidence that the UK was vaccinating at a faster rate than most European countries. If the vaccination programme accelerates, there will be increased optimism over economic recovery.
Optimism over a global economic recovery also provided an element of UK currency support with the UK currency still seen as undervalued.
GBP/USD dipped to lows near 1.3625 before rallying amid the firmer underlying tone while the GBP/EUR rallied to fresh 7-week highs around 1.2670.
As the US currency lost ground, GBP/USD re-tested the 1.3700 level as overall UK sentiment held firm.
UK GDP contracted 2.6% for November, smaller than the consensus forecasts of 4.2% decline. The industrial production data, however, was weaker than expected and there was a sharp widening in the trade deficit.
|07:00||GBP Industrial Production (M/M)(NOV, 2020)||0.50%||1.30%|
|07:00||GBP Industrial Production (Y/Y)(NOV, 2020)||-4.20%||-5.80%|
|07:00||GBP Manufacturing Production (M/M)(NOV, 2020)||0.90%||1.70%|
|07:00||GBP Manufacturing Production (Y/Y)(NOV, 2020)||-4.80%||-6.10%|
|07:00||GBP Trade Balance(NOV, 2020)||-10.18B||-12.00B|
|07:00||GBP Trade Balance Non EU(NOV, 2020)||-1.40B||-4.54B|
|10:00||Euro-Zone Trade Balance(NOV, 2020)||30.0B|
|13:30||USD PPI Ex Food & Energy (Y/Y)(DEC, 2020)||1.40%|
|13:30||USD PPI Ex Food & Energy (M/M)(DEC, 2020)||0.10%||0.10%|
|13:30||USD PPI (M/M)(DEC, 2020)||0.20%||0.10%|
|13:30||USD PPI (Y/Y)(DEC, 2020)||0.80%|
|13:30||USD Core Retail Sales (M/M)(DEC, 2020)||-0.90%|
|13:30||USD Advance Retail Sales (M/M)(DEC, 2020)||-0.20%||-1.10%|
|13:30||NY Empire State Manufacturing Index(JAN)||6||4.9|
|14:15||USD Capacity Utilization(DEC, 2020)||73.60%||73.30%|
|14:15||USD Industrial Production(DEC, 2020)||-5.50%|
|15:00||USD Business Inventories(NOV, 2020)||0.50%||0.70%|
|15:00||USD Michigan Consumer Sentiment(JAN 01)||80||80.7|