Markets focused on recession threat.

US retail sales declined 1.1% for December compared with expectations of a 0.8% decline and the November decline was also revised to 1.0% from 0.6% reported originally. There was a sharp decline in gasoline sales for the month.

Underlying sales declined 1.1% compared with expectations of a 0.4% decline and followed a 0.6% decline the previous month. There was also a 0.7% decline in the control group after a 0.2% decline for November.

US producer prices declined 0.5% for December compared with expectations of a 0.1% decline with the annual increase slowing to 6.2% from 7.3%. Underlying prices increased 0.1% on the month with a slowdown in the year-on-year increase to 5.5% from 6.2%.

The Fed’s Beige Book indicated that districts expect little growth in the months ahead while inflation pressures overall had eased and are expected to moderate further.

Overall Fed rhetoric has remained hawkish. Philadelphia head Harker, for example, stated that the Fed needs to get the Fed Funds rate above 5.0% and it will be a while before it can ease policy sharp losses.

Although there was further hawkish Fed rhetoric, markets were focussed on the US recession threat after another round of weak data. Treasuries gained further support and the 10-year yield dipped to 4-month lows below 3.35%.

Fears over a potential US recession were important in dragging equities lower during the day with significant losses on Wall Street, although there was some resilience in Asia.

After sharp losses following the Bank of Japan policy decision, there was a very strong rebound in the yen with expectations that the bank would eventually have to yield to underlying pressures. The yen also gained support as risk conditions deteriorated.

The dollar also recovered ground and the US currency index bounced from fresh 7-month lows as risk appetite deteriorated.

The latest Australian labour-market report recorded an employment decline of close to 15,000 compared with expectations of an increase close to 25,000 and the unemployment rate was slightly higher than expected at 3.5%.

The Euro posted net gains after Wednesday’s European open with EUR/USD above 1.0850. There was choppy trading amid high volatility in the yen. The dollar posted fresh losses in immediate reaction to the US data releases. EUR/USD hit 8-month highs near 1.0890.

There was a sharp correction as equities moved lower with the dollar recovering ground against most currencies.  EUR/USD traded below 1.0800 before attempting to stabilise.

Lower US yields sapped dollar support against the yen with the 10-year yield at 4-month lows. USD/JPY slumped to lows just below 127.60 with weaker equities also underpinning the yen. USD/JPY traded just above 128.00 in early Europe on Thursday.

Lower global bond yields supported the Swiss franc. EUR/CHF dipped to 0.9880 while USD/CHF slumped to 18-month lows below 0.9100 before a recovery.

Expectations of a hawkish Bank of England stance underpinned Sterling. Gains were also made on the back of firm risk appetite with a 1-month GBP/USD peak at 1.2435. Sterling retreated sharply as equities came under pressure with GBP/USD dipping to 1.2320.

Commodity currencies posted strong gains before a notable reversal as the dollar recovered and equities retreated. From 5-month highs above 0.7060, AUD/USD retreated sharply to 0.6935 at the European close. Weaker Australian data also sapped support with AUD/USD dipping below 0.6900. USD/CAD also posted strong gains to highs near 1.3520 from 1.3350 lows before settling just above 1.3500.