Risk appetite was more fragile on Friday amid reservations over the global economic recovery profile and US stimulus plans.

Risk appetite was more fragile on Friday amid reservations over the global economic recovery profile and US stimulus plans. Global equities retreated, but losses were limited by expectations of the dovish global monetary policies. Risk recovered on Monday and equities posted a renewed advance.

The dollar failed to hold its best levels against European currencies and retreated as risk conditions improved. EUR/USD found support around 1.2150 and advanced to the 1.2180 area. Sterling was hurt by weaker than expected PMI data on Friday, but regained some losses and posted gains on Monday as risk conditions provided support.

Commodity currencies were hit by a correction amid the dip in equity markets before recovering ground.

According to flash data, the German manufacturing PMI index retreated to 57.0 for January from 58.3 and below expectations of 57.5 while the services index was marginally lower at 46.8, but above market expectations. The Euro-zone PMI manufacturing index declined slightly to 54.7 from 55.2 with the services sector index slightly above expectations at 45.0 from 46.4 previously.

There was some relief following the data and the Euro resisted losses although the main feature was narrow ranges into the US open. The Euro was resilient despite a further widening of the Italian-German 10-year yield spread to 9-week highs.

The US manufacturing PMI index strengthened to 59.1 for January from 57.1 the previous month and above consensus forecasts of 56.5 while, more impressively, the services sector index strengthened to 57.5 from 54.8 and well above market expectations of 53.6 for the month despite coronavirus restrictions.

Existing home sales also beat expectations with an increase to 6.76mn from 6.71mn previously, maintaining housing-sector strength.

The dollar was unable to gain significant support as potential support from stronger than expected data was offset by a dip in defensive demand. The US currency secured some relief against commodity currencies and EUR/USD settled around 1.2170.

CFTC data recorded a net increase in long Euro positions to 163,000 contracts in the latest week, lessening the potential for further buying and maintaining the possibility of a sharp correction if there is a shift in sentiment.

Despite Euro-zone coronavirus reservations and further uncertainty over the Italian political situation, US dollar weakness dominated on Monday with EUR/USD around 1.2180 as commodity currencies posted net gains.

The dollar remained generally weak on Friday, but did move higher following the latest US PMI data. The Japanese yen lost some ground even though bond yields edged lower and equities lost ground and USD/JPY edged higher to around 103.80 at the New York close.

Markets expect that the Federal Reserve will maintain a notably dovish stance at this week’s policy meeting, but fresh fears over the near-term outlook could trigger renewed defensive support for the US currency. Progress on economic support measures will also be a key factor in the short term as Congress returns to session.

There were some reservations over US-China relations with a US aircraft carrier group entering the South China Sea over the weekend. Comments from the Biden Administration on foreign policy will be monitored closely in the short term even if economic developments dominate and the fiscal stimulus dominate sentiment.

The dollar was unable to make headway on Monday and USD/JPY settled around 103.70 with the yen slightly weaker on the crosses.

According to the flash reading, the UK PMI manufacturing index declined to 52.9 for January from 57.5 previously and below consensus forecasts of 57.3. The services-sector index retreated sharply to an 8-month low of 38.8 from 49.4 and below forecasts of 49.9 with the composite production index also at 8-month lows. There were important supply-chain difficulties within manufacturing and the underlying performance was weaker than the headline would suggest. The services sector was inevitably undermined by coronavirus restrictions, reinforcing expectations of a sharp first-quarter GDP contraction.

Sterling continued to lose traction following the data with concerns over underlying vulnerability, especially with speculation that there would be further delays in re-opening schools and easing coronavirus restrictions. There will be further fiscal stresses, increasing the pressure for further Bank of England action.

The UK currency still gained some protection from optimism over the vaccine programme and the number of new cases continued to ease slightly. After dipping to lows below 1.3650, GBP/USD recovered to around 1.3680 while GBP/EUR peaked at 1.1290 before retreating to just below the 1.1220 level.

Economic Calendar

08:45European Central Bank President Lagarde Speaks
09:00German Business Expectations(JAN)92.5092.8
09:00IFO - German Current Assessment(JAN)89.0091.3
09:00German IFO Business Climate Index(JAN)90.0092.1
13:30USD Chicago Fed National Activity Index(DEC, 2020)0.27
13:45ECB Lane speech
14:45German Buba President Weidmann speech
16:15European Central Bank President Lagarde Speaks

*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.