Markets have again been unsettled by major uncertainty over speculative trading.

Markets have again been unsettled by major uncertainty over speculative trading with month-end liquidation also significant at the end of last week.

Risk appetite was unable to sustain a recovery on Friday and confidence dipped again amid fears over position liquidation. Wall Street equities dipped sharply on Friday with the sharpest weekly decline for 3 months.

The dollar initially declined before gaining some relief as risk appetite dipped again. EUR/USD hit selling interest near 1.2150 as euro-zone confidence remained fragile. Risk conditions stabilised on Monday with limited net gains for equities, but uncertainty remained elevated. Sterling has been broadly resilient and posted gains on Monday amid vaccine optimism. Commodity currencies posted net losses as equities declined before posted limited gains on Monday

Spain reported a GDP increase of 0.4% for the fourth quarter of 2020 following a 16.4% advance the previous quarter and compared with consensus forecasts of a 1.5% decline, although there was still an annual contraction of 9.1%.  The French contraction was also less severe than expected for the quarter while Germany managed to register 0.1% growth. Germany also reported a 41,000 decline in unemployment for January after a 40,000 fall the previous month.

Euro-zone M3 money supply growth strengthened to 12.3% in the year to December from 11.0% previously, although private-sector loan growth was held to 3.1%.

Although there were concerns over potential ECB verbal intervention, futures markets suggested that the potential for an interest rate cut had declined as some ECB officials downplayed the potential benefits which limited fresh Euro selling and the GDP provided an element of support for the currency.

US December personal income increased 0.6% following a 1.3% decline previously, although there was a 0.2% decline in spending, the second successive reduction.

The Chicago PMI index strengthened to 63.8 for January from 58.7 the previous month and above consensus forecasts of 58.4 and the highest reading since July 2018 as order backlogs also increased to 23-month high. The data releases overall had little impact with the US dollar tending to lose ground and EUR/USD advanced to highs near 1.2150. The Euro lost edged lower later in the US session as Wall Street equities moved lower amid a fresh dip in global risk appetite.

CFTC data recorded an unchanged long Euro position for the latest week, maintaining the potential for position adjustment and a squeeze on short dollar positions.

The dollar was little changed on Monday and EUR/USD settled around 1.2125 as a slide in German retail sales for December undermined single-currency support.

The dollar posted further gains in Europe on Monday and USD/JPY strengthened to fresh 10-week highs just below the 105.00 level as the yen lost ground on the crosses amid month-end position adjustment. The US currency stalled later in the day as US equities started to lose ground and uncertainty remained high.

President Biden warned that the cost of inaction on fiscal stimulus is growing every day. Biden is due to meet with an important group of Republican Senators after Monday’s New York close with rhetoric monitored closely amid Republican pressure for the stimulus plans to be pared back.

China’s manufacturing PMI index retreated to 51.3 for January from 51.9 previously and below consensus forecasts of 51.5 while there was a sharper decline in the non-manufacturing index to 52.4 from 55.7 previously. The Caixin PMI manufacturing index also declined to 51.5 for January from 53.0 previously which was below expectations and the weakest reading since June.

Reports suggested Japan’s state of emergency would be extended until March 7th. Chinese overnight rates retreated sharply on Monday which provided some relief to risk conditions and also weakened the yuan. The dollar was unable to make headway and USD/JPY settled near 104.70.

There was choppy Sterling trading on Friday as month-end position adjustment had a significant impact. GBP/USD dipped to lows near 1.3650 before recovering strongly to approach 32-month highs posted earlier in the week. Overall confidence in the vaccine programme remained strong which provided underlying support, but the row with the EU tended to overshadow the domestic programme and there were still notable concerns surrounding the short-term UK economic outlook.

There was a fresh retreat after the European close as wider risk appetite deteriorated with a sharp move lower in US equities and a GBP/USD retreat to below 1.3700.

CFTC data recorded a decline in long Sterling contracts to 8,000 in the latest week from 14,000 the previous week which does not suggest that the recent firm Sterling tone has been driven by hedge fund buying and there will be the potential for near-term backing.

There will be an element of caution ahead of Thursday’s Bank of England policy decision, especially with commentary expected on negative interest rates. The UK currency did make net gains on Monday with a GBP/USD move to 1.3750 before stalling while GBP/EUR rallied to near 1.1330.

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