UK inflation edges lower.

The New York Empire manufacturing index slumped to -32.9 for January from -11.2 the previous month. This was substantially below consensus forecasts of -8.7, the weakest reading since mid-2020 and also the fifth lowest reading on record. New orders and production also contracted sharply on the month with a smaller decline in unfilled orders.

There was still a small increase in employment for the month while there was a notable easing of inflation pressures with a smaller increase in prices paid.

Companies were slightly more optimistic over the outlook while expecting cost pressures to ease further.

The German ZEW economic conditions index improved strongly to 16.9 for January from -23.3 the previous month and substantially above consensus forecasts of -15.0. There was, however, only a small improvement in the current conditions component to -58.6 from -61.4 the previous month.

After the Wall Street open, there were reports that the ECB was considering a slowdown in the potential pace and extent of interest rate increases. According to sources, the bank is still expecting to increase rates by a further 50 basis points at the February meeting, but the bank is then considering a smaller increase at the March meeting.

Following the ECB source report, the Euro dipped sharply across the board with losses against all majors. There was, however, buying on dips as risk appetite held firm.

The headline Canadian CPI inflation rate declined to 6.3% for December from 6.8% and slightly below expectations of 6.4% as fuel prices dipped sharply on the month.

There was also a small monthly decline in the Bank of Canada core inflation readings.

As expected, the Bank of Japan held interest rates at -0.1%, but also made no further changes to the yield curve control (YCC) policy with the ceiling held at 0.50%. GDP forecasts were revised slightly higher while there was a smaller than expected increase in inflation forecasts.

The central bank also introduced a technical tool to lessen distortions and prevent upward pressure on yields.

Markets had expected a further policy adjustment with yields allowed to increase further and the policy decision triggered heavy yen selling.

The dollar surged to highs just above 131.50 against the yen before a retreat to 130.75 with the decision also helping to underpin risk appetite.

The Bank of Japan decision and ECB reports helped underpin risk appetite and equities secured net gains in Asia. Hopes for a rebound in China also helped underpin risk-sensitive currencies.

The headline UK inflation rate declined to 10.5% from 10.7% previously which was in line with market expectations. The core rate held at 6.3% and marginally above expectations.

The Euro gained limited support from the German ZEW data, but EUR/USD was capped near 1.0870. The Euro dipped sharply after the source reports of a slowdown in rate hikes. EUR/USD dipped to lows just below 1.0770 before recovering the 1.0800 level. The overall dollar performance was mixed.

USD/JPY settled around 128.50 at the European close. The yen slumped after the Bank of Japan policy decision with USD/JPY highs just above 131.50. USD/JPY was unable to hold peak levels with a retreat to near 130.70.

The Swiss franc strengthened after the ECB source reports. EUR/CHF dipped sharply to 0.9930 before settling near 0.9950 while USD/CHF recovered from lows below 0.9200 to trade around 0.9225.

Sterling secured net gains on expectations that stronger wages data would force a hawkish Bank of England stance. Firm risk conditions also underpinned the Pound. GBP/USD hit 4-week highs above 1.2300.

Commodity currencies posted net gains on hopes for an early end to the global monetary tightening cycle. AUD/USD tested the 0.7000 area and traded above this level on Wednesday with 5-month highs at 0.7020. USD/CAD dipped to lows at 1.3370 on Tuesday from highs around 1.3435 and retreated further to 1.3355 on Wednesday.

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