Risk appetite held steady on Tuesday amid some hopes that very aggressive Fed tightening could be avoided.

Risk appetite held steady on Tuesday amid some hopes that very aggressive Fed tightening could be avoided.  US bond yields recovered from intra-day lows with a slight net gain.

Wall Street indices posted net gains on optimism that earnings data would hold firm. Global bourses also made significant headway over the next 24 hours.

The dollar attempted to recover from intra-day lows, but still posted a further significant net loss. Expectations of a less dovish ECB stance underpinned the Euro. EUR/USD briefly dipped on Ukraine reservations, but posted a net advance to around 1.1275.  Sterling secured net gains on BoE rate-hike expectations with GBP/USD trading above 1.3500.

Commodity currencies posted net gains as the US dollar lost ground. The Australian dollar posted a net gain despite dovish rhetoric from Reserve Bank Governor Lowe.

The final Euro-zone manufacturing PMI index was revised slightly lower to 58.7 from the flash reading of 59.0 with a significant miss for the Italian reading while the Spanish reading met market expectations. Germany recorded a sharp unemployment decline of 48,000 for January after a decline of 29,000 the previous month and compared with a decline of around 5,000. The German 2-year yield increased to a 6-year high which helped underpin confidence in the Euro. The single currency maintained a firm tone in European trading on Tuesday and pushed to highs near 1.1280 with the dollar also tending to drift lower against all major currencies.

The US ISM non-manufacturing index declined to 57.6 for January from 58.8 the previous month and in line with consensus forecasts. There was a slowdown in new orders growth and production growth while order backlogs also grew more moderately on the month.

Employment increased moderately on the month while prices increased at a faster rate, although the prices component remained below levels recorded late in 2021.

JOLTS data recorded an increase in job openings to 10.93mn for December from 10.78mn the previous month and above market expectations of 10.30mn.

Markets had been braced for a weaker release and the data overall provided an element of relief with EUR/USD retreating to below 1.1250 although the dollar overall struggled to gain any significant traction. The Euro was hampered to some extent by tough rhetoric from Russian President Putin over Ukraine, although there was no sustained selling at this stage and EUR/USD held firm around 1.1275 on Wednesday as the dollar was unable to secure a sustained recovery.

The focus will shift to the US jobs data with the ADP release on Wednesday ahead of Friday’s employment report. Philadelphia Fed President Harker did warn that the forthcoming employment report could be weak due to an Omicron impact with markets expecting a sharp slowdown in job growth for the month.

Philadelphia’s Harker stated that a 25 basis point rate increase is warranted in March. He added that the Fed may need to move more aggressively if there is a spike in inflation and it could do a 50 basis-point increase, although he is a little less convinced of that right now. Atlanta Head Bostic stated that businesses were seeking alternate suppliers which was tending to increase costs and there would be a real risk if expectations increased to 4% or higher.

US Treasuries strengthened at the New York open, but lost ground following the ISM data with the 10-year yield moving back above 1.75% with reduced speculation of a 0.50% March rate hike. In this environment, USD/JPY rallied from lows around 114.60 to trade little changed, although there was still selling interest on rallies.

Narrow ranges prevailed on Wednesday with Chinese markets remaining closed for the new-year holidays with USD/JPY trading around 114.65.

Nationwide reported an increase in UK house prices of 0.8% for January with a year-on-year increase of 11.2% from 10.4% previously. UK mortgage approvals increased to 71,000 for December from 67,900 the previous month and above consensus forecasts. There was a slight overall slowdown in net lending to individuals to £4.4bn from £4.9bn the previous month, although slightly above market expectations with a solid increase in consumer credit.

The final UK PMI manufacturing index was revised higher to 57.3 from the flash reading of 56.9. There was a slight slowdown in new orders growth while there was a slight easing of supply-side pressures. There was also a net easing of upward pressure on costs for the month.

There was limited impact from the data, although overall Sterling sentiment held firm amid expectations that the Bank of England would sanction another interest rate increase at this week’ meeting. There are strong expectations that the bank will raise rates to 0.50% on Thursday with higher yields underpinning the UK currency.

GBP/USD broke above 1.3500 while GBP/EUR rallied to around 1.1990 as risk appetite held steady. BRC data recorded a 1.5% annual increase in shop prices for December, the strongest reading since 2012 with GBP/USD holding above 1.3500 on Wednesday.

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