Overall risk appetite strengthened on Tuesday amid global reflation hopes.
Narrow ranges prevailed on Monday with activity dampened by the US holiday. There were renewed expectations of strong fiscal and monetary support, especially after reported comments from Treasury Secretary Nominee Yellen. Overall risk appetite strengthened on Tuesday amid global reflation hopes. US equity futures moved higher which underpinned most Asian bourses.
The dollar initially held firm, but failed to hold its best levels and retreated on Tuesday amid firmer risk conditions. EUR/USD edged higher towards 1.2100, but buying was still limited.
Sterling regained some ground amid vaccine optimism and stronger risk conditions with GBP/USD close to 1.3600. Commodity currencies recovered from intra-day lows and posted net gains on Tuesday.
The Euro continued to drift lower in early Europe on Monday as risk conditions remained fragile. There was also further speculation over a liquidation of stale long Euro positions following the recent retreat and EUR/USD dipped to fresh 6-week lows at 1.2055.
In its latest monthly report, the Bundesbank stated that the German economy was resilient in the fourth quarter of 2020 as a rebound in construction and industry offset the impact of a slump in the hospitality and retail sectors. The bank did, however, warn that there could be a sizeable setback if infections fail to ease significantly and restrictions on activity persist or are tightened. The German government will hold further talks with regional leaders on Tuesday with expectations that restrictions will be tightened and these concerns will continue to have some restraining influence on the Euro.
Italian Prime Minister Conte continued his efforts to salvage the coalition government, although the overall market impact was still limited.
Overall ranges were narrow, especially with US markets closed for a holiday, together with a lack of new incentives and data releases.
Markets were monitoring US political developments with extremely tight security arrangements in Washington ahead of President-elect Biden’s inauguration on Wednesday. The dollar eased slightly later in the day with a recovery in commodity currencies and the Euro secured a slight net recovery.
Stronger risk appetite curbed potential dollar demand on Tuesday with commodity currencies posting significant net gains and EUR/USD edged towards 1.2100.
US equity futures edged higher on Monday, although the dollar failed to make headway as yen maintained a firm tone with USD/JPY held around 103.70.
Markets will continue to monitor any comments from Treasury Secretary Nominee Yellen who is due to face a Senate confirmation hearing on Tuesday. According to reports Yellen will state that the US should act in a big way to boost fiscal spending. With interest rates at such low levels, she will state that benefits will far outweigh the costs. Expectations of strong fiscal backing provided solid support to risk conditions and markets will also monitor any comments on the US dollar.
President Trump issued a proclamation lifting a travel ban from Europe, but the Biden team rejected the move and stated that measures could be tightened. US equity futures still made headway which curbed immediate demand for the Japanese currency and Asian bourses outside China secured significant gains.
The Bank of Japan is not expected to make major policy changes at this week’s meeting, although the bond-buying programme could be adjusted slightly.
In the positive risk environment, USD/JPY edged higher to just above the 104.00 level as EUR/JPY posted significant gains to the 125.90 area from 125.20 on Monday.
There were reports that the EU would seek an extension in ratifying the UK/EU trade deal until April from February, although this should not have a significant impact with the deal agreed provisionally and in operation. There will be some reservations over a negative economic impact from increased trade friction, although coronavirus developments are liable to have a much larger impact on activity. Markets were also uneasy over long-term fundamental concerns.
The UK currency gradually regained ground with support from optimism over the coronavirus vaccine developments. The UK government announced that the total number of vaccines administered had increased to over 4.0 million with the UK still out-pacing Euro-zone countries.
Expectations that the UK could be able to ease restrictions earlier than euro-zone countries provided an element of Sterling support.
The dollar also faded slightly towards the European close with GBP/USD strengthening towards 1.3600 while EUR/GBP retreated to 1.1210. Stronger global risk conditions were significant in supporting the UK currency on Tuesday and GBP/USD edged above 1.3600 with GBP/EUR hanging around 1.1250.
|07:00||Germany CPI (M/M)(DEC, 2020)||0.50%||-0.80%|
|07:00||Germany CPI (Y/Y)(DEC, 2020)||-0.30%||-0.30%|
|07:00||Germany Harmonised CPI (M/M)(DEC, 2020)||0.60%||-1.00%|
|07:00||Germany Harmonised CPI (Y/Y)(DEC, 2020)||-0.70%||-0.70%|
|07:30||CHF PPI (M/M)(DEC, 2020)||-0.10%|
|10:00||German ZEW Survey (Current Situation) (JAN)||-66||-66.5|
|10:00||German ZEW Survey (Economic Sentiment)(M/M)(JAN)||45.5||55|
|10:00||EUR Euro-Zone ZEW Survey (Economic Sentiment)(JAN)||54.4|
|13:30||CAD Wholesale Sales (M/M)(NOV, 2020)||0.90%||1.00%|
|21:00||USD TIC Net Long-Term(NOV, 2020)||51.9B|