Fed minutes had little impact, but US economic data releases were stronger than expected.

Fed minutes had little impact, but US economic data releases were stronger than expected.

The dollar index strengthened to the highest level since May 2017 as most other majors lost ground and EUR/USD hit fresh 34-month lows. The yen dipped sharply during the day with USD/JPY posting sharp gains to 8-month highs near 111.80.

US and European equity markets posted strong gains to record highs, although sentiment outside China was more cautious in Asia on Thursday. Sterling retreated after failing to hold gains triggered by higher than expected UK inflation data.

US January housing starts declined slightly to an annual rate of 1.57mn from a revised 1.63mn, although this was well above consensus forecasts while building permits increased to 1.55mn from 1.42mn. Although generally mild weather boosted construction activity, the data-maintained confidence in the outlook. Producer prices increased 0.5% with the annual increase at a 9-month high of 2.1% compared with expectations of 1.6% while core prices increased 0.5% on the month.

The dollar continued to advance after the data and EUR/USD retreated further to fresh 34-month lows near 1.0780.

Minneapolis Fed President Kashkari stated that the most likely outcome would be for steady interest rates on a 3-6month view before another cut, although rate hikes could be needed if there were positive shocks.

The dollar advanced further and the currency index strengthened to the highest level since May 2017. Minutes from January’s Federal Reserve meeting stated that risks to economic activity were somewhat more favourable than the previous meeting due to an easing of trade tensions. Overall, the current policy stance was likely to remain appropriate for a time provided information remains broadly consistent with the outlook. Reaction was muted with futures markets still indicating around a 10% chance that interest rates would be cut at the March meeting with a 45% chance of a cut by the end of June.

The dollar held a steady tone in early Europe on Wednesday before a USD/JPY break above the 110.00 level. Previous moves above 110.00 had faded quickly, but this attack was more successful and triggered substantial stop-loss dollar buying with a quick move to the 110.50 area. Overall dollar sentiment held firm while strong equity markets undermined defensive demand for the Japanese currency and the yen was undermined by fears that the coronavirus would undermine the Japanese economy.

US yields moved only marginally higher, but US equities advanced to fresh record highs and the dollar secured further strong gains in New York with USD/JPY highs around 111.30 as the yen weakened sharply on the crosses.

Treasuries edged marginally lower following the Fed minutes with 8-month USD/JPY highs close to 111.50. Coronavirus cases decline in Hubei which underpinned sentiment, although uncertainty persisted, especially with China again changing the methodology for reporting cases. The Chinese central bank cut interest rates, in line with consensus forecasts with the 1-year prime rate at 4.05% from 4.15%. Asian equity markets outside China were mixed, but USD/JPY moved above 111.50 in early Europe to 111.80.

The UK CPI inflation rate increased to a 6-month high of 1.8% for January from the 5-year low of 1.3% the previous month and above consensus forecasts of 1.6% as petrol prices increased and base effects were less favourable given the drop in energy prices last year. The underlying rate also beat market expectations with an increase to 1.6% from 1.4%. Sterling pushed higher after the data but failed to hold the gains with the inflation rate expected to decline over the next few months.

Economic Calendar

07:00CHF Trade Balance(JAN)-1.975B
07:00EUR German PPI (Y/Y)(JAN)-0.40%-0.20%
07:00EUR German PPI (M/M)(JAN)0.20%0.10%
07:00German GfK Consumer Confidence (MAR)9.89.9
09:30GBP Retail Sales ex-Fuel (Y/Y)(JAN)2.90%0.70%
09:30GBP Retail Sales ex-Fuel (M/M)(JAN)0.70%-0.80%
09:30GBP Retail Sales (Y/Y)(JAN)2.60%0.90%
09:30GBP Retail Sales (M/M)(JAN)0.50%-0.60%
11:00GBP CBI Industrial Trends Orders (FEB)-23-22
13:30USD Philadelphia Fed. Manufacturing Index(FEB)3.817
13:30CAD New Housing Price Index (M/M)(JAN)-0.2
15:00Euro-Zone Consumer Confidence(FEB)-7.8-8.1
23:30JPY National CPI Ex-Fresh Food (Y/Y)(JAN)0.80%0.70%
23:30JPY National CPI (Y/Y)(JAN)0.70%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.