US consumer inflation expectations decline.

The University of Michigan consumer confidence index strengthened to 64.6 for January from 59.7 the previous month and above consensus forecasts of 60.0. There was a significant improvement in the current condition’s component and a smaller improvement in the expectations component.

The 1-year inflation expectations index retreated sharply to 4.0% from 4.4% the previous month while the 5-year index edged higher to 3.0% from 2.9%.

There was choppy trading in Treasuries during Friday with the 10-year yield held below the 3.50%, but unable to hold below 3.45%.

The decline in US inflation expectations triggered further hopes that the Fed can adopt a less hawkish policy. There was also fresh optimism that there would be a rebound in the Chinese economy which would underpin the global outlook and equities held firm on Friday.

The yen gained further strong support against major crosses with further speculation that the Bank of Japan would shift to a less expansionary policy at the latest policy decision.

USD/JPY posted fresh 7-month lows at 127.25 before a recovery. The latest statement is due during the Asian session on Wednesday.

The dollar index posted fresh 7-month lows in Asia on Monday before managing to secure a net recovery as USD/JPY bounced and equities were hampered by pressure for at least a limited correction.

The yen gained further CFTC data recorded a decline in short yen positions to near 35,000 contracts from close to 47,000 the previous week and the smallest short position since later August 2022 which will limit the scope for further short covering and yen buying.

The Bank of Canada business outlook survey will be released on Monday with the data on inflation expectations watched particularly closely.

The latest Chinese data in Asian trading on Tuesday including GDP and industrial production will also be important for overall risk conditions.

The dollar lost some ground after the University of Michigan consumer confidence data with the decline in 1-year inflation expectations reinforcing expectations of a less hawkish policy. The Euro was again supported by a decline in market gas prices. US yields overall were little changed at lower levels, limiting dollar support.

EUR/USD found support below 1.0800 and rallied to 1.0830 at the US close on Friday. EUR/USD traded just above 1.0850 in Europe on Monday.

The yen continued to gain strong support against major currencies. USD/JPY slumped to fresh 7-month lows just below 127.25 before rallying slightly to 127.65.

The Swiss franc managed to regain some ground with a correction after sharp losses. EUR/CHF settled around 1.0035 with USD/CHF around 0.9240.

Sterling recovered some ground with some hopes that lower energy prices would provide support for the domestic economy.  Firm global risk conditions also underpinned the Pound. GBP/USD advanced to 1-month highs at 1.2290 before settling around 1.2255 with EUR/GBP retreating to 0.8855.

Commodity currencies rallied from intra-day lows as the dollar retreated. AUD/USD rallied from 0.6915 lows to trade around 0.6975 on Friday. AUD/USD traded at 4-month highs just above 0.7000 on Monday before trading back below this level.  USD/CAD rallied strongly to highs at 1.3440 before a retreat to 1.3370.

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