Fed minutes confirm inflation fears.

US retail sales rebounded for January with a 3.8% increase compared with consensus forecasts of a 2.0% gain, although the December data was revised down to show a 2.5% slide. Motor vehicle sales increased 5.7% on the month and there was a robust increase in furniture sales while online sales also posted strong gains.

Underlying sales increased 3.3% on the month compared with expectations of a 0.8% gain while the control group increased 4.8% following a sharp 4.0% decline for December. The downward revisions dampened impact from the strong headline release, but the data offered some reassurance over underlying spending trends.

According to minutes from January’s Federal Reserve meeting, participants anticipated that raising interest rates would be necessary soon. There was also agreement that uncertainty about the path of inflation was high and that risks were skewed to the upside, especially with reports of widespread input cost pressures.

Most participants also emphasised that it would be necessary to remove policy accommodation at a faster pace if inflation does not fall as expected and members also backed faster rate hikes than seen in 2015.

Several participants did express some concerns over downside risks to the outlook. There no major hawkish surprises in the minutes and Fed Funds futures rallied with markets indicating slightly less than a 50% chance of a 0.50% rate hike at the March policy meeting which curbed dollar support.

The headline Canadian consumer inflation rate increased to 5.1% for January from 4.8%. This was the highest rate since 1991 and above expectations of 4.8% while the core rate increased to 4.3% from 4.0%.

Bank of Canada Deputy Governor Lane stated that the bank is on alert to the risk of more persistent inflation. He also stated that the bank will be nimble and, if necessary forceful to tackle inflation.

The inflation data and Lane’s comments reinforced expectations of a March rate hike and the possibility of a 0.50% hike at that meeting. The Canadian dollar, however, was unable to make any headway.

NATO officials expressed scepticism over Russian claims that it was withdrawing troops from the Ukraine border and stated that there was no hard evidence of this.

Overall risk appetite held firm with expectations that there will be a protracted and lower-level conflict.

Risk appetite dipped again in Asia on Thursday following reports that Ukraine forces had fired mortars on rebel-held areas around Donetsk.

Risk appetite will remain fragile in the short term with markets continuing to react to media headlines.

The Australian unemployment rate held at 4.2% for January while there was an employment increase of close to 13,000 for the month compared with expectations of a decline close to 10,000.

The Australian dollar was unable to make headway as risk appetite dipped during the Asian session.

Risk conditions were relatively stable during Wednesday, although tensions remained elevated with a fresh spike in risk aversion in Asia on Thursday. There were no major hawkish surprises in the Federal Reserve minutes with a strong commitment to rate increases.

US bond yields edged lower with the 10-year yield dipping below 2.00%. USD/JPY dipped to lows below 115.20 before stabilising

Italian bond yields declined which helped cushion the Euro to some extent. EUR/USD edged towards 1.1400 before a sharp retreat to near 1.1320 on fresh Ukraine fears and stabilisation above 1.1350

Sterling overall edged higher on yield grounds with GBP/USD testing 1.3600 before correcting lower. EUR/GBP retreated to 0.8360 on existing yield spreads.

AUD/USD strengthened to around 0.7215 before a dip below 0.7200 as risk aversion offset solid jobs data. USD/CAD edged lower on Hawkish Bank of Canada rhetoric, but traded above 1.2700 on Thursday with fragile risk conditions limiting Canadian support.

Economic Calendar

07:00CHF Trade Balance(JAN)3.693B
13:30USD Initial Jobless Claims260K
13:30USD Continuing Jobless Claims1675K
13:30USD Building Permits(JAN)1.701M1.885M
13:30USD Building Permits (M/M)(JAN)9.80%
13:30USD Housing Starts(JAN)1.650M1.702M
13:30USD Housing Starts (M/M)(JAN)1.40%
13:30USD Philadelphia Fed. Manufacturing Index(FEB)23.2
13:30CAD Foreign Securities Purchase(DEC, 2021)30.15B
23:30JPY National CPI Ex-Fresh Food (Y/Y)(DEC, 2021)0.60%0.50%
23:30JPY National CPI (Y/Y)(JAN)0.80%

*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.