The dollar was unable to hold intra-day highs and closed mixed ahead of the Fed statement.

There was further choppy trading across asset classes on Tuesday, although volatility eased slightly during the day.

Risk appetite remained cautious, especially with Ukraine tensions, but with speculation that selling in risk assets had been overdone. US bond yields edged higher with caution ahead of Wednesday’s Federal Reserve policy statement.

Wall Street equities were unable to sustain gains and posted net losses with further losses in the tech sector. Asian equities were mixed as caution prevailed given expectations of further US volatility.

The dollar was unable to hold intra-day highs and closed mixed ahead of the Fed statement.   EUR/USD recovered from lows to settle around 1.1300 despite generally negative sentiment.  Sterling recovered ground as risk appetite improved with GBP/USD nudging above 1.3500.

Commodity currencies rallied as equities pared losses with Canadian dollar support ahead of the Bank of Canada statement.

The German IFO business confidence index strengthened to 95.7 for January from 94.8 the previous month confounding expectations of a slight reduction on the month. There was a significant retreat in the current conditions component which was offset by a notable improvement in the expectations component.

The IFO stated that the New Year started with a glimmer of hope, but it was too early to talk about a turnaround in the economic situation. The IFO did note that there was a slight easing of supply shortages in the industrial sector and delivery bottlenecks in retail had also eased.

ECB chief economist Lane stated that it was clear that the Omicron impact on the economy is only for a few weeks. He was still confident that inflation will fall quite a bit later this year. The Euro was unable to draw support from the IFO data and lost ground amid expectations of negative yield spreads and unease surrounding Ukraine.

The US Philadelphia Fed non-manufacturing index dipped sharply to -16.2 for January from 27.3 the previous month with a sharp slowdown in new orders growth. The sharp dip in likely to be related to the Omicron variant and companies remained optimistic over the six-month outlook. The labour market remained tight and pricing pressures increased on the month with a strong increase in the prices paid index.

The Case Shiller house-price index recorded an 18.3% increase in the year to November from 18.4% the previous month.

The Euro was unable to regain significant ground and EUR/USD traded around 1.1275 at the European close before a recovery to around 1.1300 as commodity currencies rallied and the dollar failed to sustain gains. Markets also remained wary over potentially substantial position adjustment later this week with potential dollar buying.

Volatility eased on Wednesday with caution ahead of the Federal Reserve policy decision. Markets expect the Fed will signal a rate hike for March with the rhetoric watched very closely. The dollar was little changed in early Europe with EUR/USD fractionally below 1.1300.

Bank of Japan Governor Kuroda stated that monetary policy must remain accommodative as the inflation target remains distant with comments having little yen impact.

US consumer confidence retreated to 113.8 from a revised 115.2 previously, although it was above consensus forecasts.

The Richmond Fed manufacturing index retreated to 8 from 16 previously as the growth in new orders slowed, but there was a further increase in pricing pressures.

There was choppy trading in Treasuries, although overall yields were little changed on the day. There was further choppy trading on Wall Street with sharp swings in the main indices. The yen held a firm underlying tone amid a generally risk-averse tone with USD/JPY held below 114.00.

Asian equities were mixed on Wednesday with a more measured tone in equity markets ahead of the Federal Reserve statement later in the day.

USD/JPY settled just below 114.00 with EUR/JPY around 128.75, but volatility is liable to spike higher later in the day.

The CBI industrial orders index was unchanged at 24 for January and slightly above market expectations. Companies reported that shortages of skilled labour were hampering production plans with the situation at the most serious since 1973. Cost pressures remained very strong with the strongest increase in domestic prices since 1980 and companies expect further strong increases over the next few months, reinforcing inflation concerns within the Bank of England.

Markets were continuing to monitor political developments as the police announced that there would be an investigation into allegations surrounding social events at Downing Street. Nevertheless, overall risk conditions continued to dominate market trading.

GBP/USD found support below 1.3450 and rallied to just above 1.3500 as equities recovered ground while GBP/EUR rallied to 1.1950.

Political speculation will be elevated on Wednesday, but overall risk conditions are likely to have a larger impact and GBP/USD was just above 1.3500 in early Europe.

Economic Calendar