The UK announced strong phase-3 trials for the Novavax vaccine with efficacy of close to 90% and was effective against the UK variant.

After the setback on Wednesday, risk appetite strengthened sharply on Thursday as US small-cap trading dominated market sentiment. Wall Street equities recovered from losses amid reduced liquidation fears Sentiment turned again on Friday as US equity futures moved sharply lower with volatility in equities having a wider impact. Asian equities retreated and risk appetite dipped once again.

The dollar lost ground as defensive demand faded again before regaining ground on Friday as risk conditions dominated. EUR/USD moved to highs near 1.2150 before a retreat to 1.2100 as the dollar regained territory. Sterling moved steadily higher before fading slightly with solid underlying support.

The strong recovery in commodity currencies reversed again on Friday ss risk conditions dominated.

Euro-zone January industrial sentiment recovered slightly to -5.9 from -6.8 previously while there was a limited weakening within the services sector. German consumer prices increased 0.8% for January with the year-on-year rate at 1.0% from -0.3% with the rate pushed significantly higher by the ending of a temporary VAT cut.

According to the advance reading, US GDP increased at an annual rate of 4.0% for the fourth quarter of 2020 which was in line with consensus forecasts and followed the record surge of 33.4% for the previous quarter. Consumer spending increased 2.5% for the quarter while there was a strong recovery in investment.

Initial jobless claims declined to 847,000 in the latest week from a revised 914,000 the previous month and below expectations of 875,000. Continuing claims declined to 4.77mn from 4.97mn previously, although overall claims increased sharply in the latest reporting week with the number claiming pandemic assistance jumping by 2.4mn on the week which illustrated underlying vulnerability in the labour market. Short-term economic reservations continued given vulnerability in services.

The goods trade balance declined to $82.5bn from $85.5bn the previous month while new home sales increased to 842,000 from a downwardly-revised 829,000.

After posting gains on Wednesday, the dollar retreated during the day as risk appetite recovered sharply with commodity currencies also rebounding strongly. EUR/USD broke above 1.2100 and advanced to near 1.2140 at the European close.

The dollar gained fresh demand on Friday as risk appetite dipped again and commodity currencies retreated once again. French GDP declined 1.3% for the fourth quarter of 2020 compared with consensus forecasts of a 4.0% decline which provided some support and EUR/USD held just above 1.2100.

After the sharp losses on Wednesday, there was a rapid turnaround on Thursday with US equity futures moving sharply higher. Several small-cap stocks on Wall Street were put on a sell-only basis which triggered significant losses and only reduced the risk that hedge funds would be forced to cover short positions.

The Japanese yen lost significant ground on the crosses and the US dollar held steady despite losses against other major currencies. Markets continued to monitor US fiscal developments during the day with some hopes that stimulus measures would be brought forward, although developments in equities tended to dominate.

Chinese overnight rates increased to 5-year highs on Friday amid tight liquidity which triggered fresh unease in equity markets. US equity futures posted sharp losses overnight which triggered a fresh round of risk aversion. The latest Chinese PMI data will be released over the weekend which will have an impact on risk appetite.

Japanese industrial production declined 1.6% for December while consumer confidence weakened, although the Tokyo core inflation rate was at -0.4% from -0.9% previously. The Japanese yen was unable to secure significant defensive support and USD/JPY strengthened to 7-week highs just above the 104.50 area.

The latest ONS estimate suggested that 17% of the UK workforce was on furlough in the third week of January, the highest proportion since July. There were fresh reservations over the potential consumer spending trends and impact on government borrowing data.

Although underlying Sterling sentiment was relatively contained, the UK currency did secure net support from a sharp recovery in risk conditions during the day, especially with strength on Wall Street. GBP/USD moved back above the 1.3700 level as the US currency lost ground with a peak near 1.3750 while GBP/EUR rallied to 1.1318 at the European close. There was also further interest in buying Sterling dips from international investors.

The UK announced strong phase-3 trials for the Novavax vaccine with efficacy of close to 90% and was effective against the UK variant, although a separate trial in South Africa suggested the vaccine was less effective against the South Africa mutation. Markets will be wary over month-end position adjustment on Friday and Sterling was hampered by a fresh bout of risk aversion.

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