The Euro was undermined by reservations over the growth outlook amid slow vaccination progress.

Global equities posted significant gains on Tuesday with a strong lead from Wall Street. Overall risk appetite was boosted by global recovery hopes and expectations of further fiscal stimulus. The dollar again drew support on cyclical grounds and US growth hopes with 2-month highs despite positive global risk appetite.

The Euro was undermined by reservations over the growth outlook amid slow vaccination progress. EUR/USD dipped to 2-month lows near 1.2000 before a slight recovery. Sterling held firm with an 8-month high against the Euro before correcting slightly.

Commodity currencies were mixed with net gains for the Canadian dollar amid higher energy prices. The firm dollar curbed support for precious metals.

Euro-zone GDP declined 0.7% for the fourth quarter of 2020 compared with consensus forecasts of a 0.9% contraction with the year-on-year decline of 5.1%. The data failed to provide any Euro support, especially as data from individual countries released last week suggested that there could be a smaller dip for the quarter.

The Euro overall continued to edge lower with markets also still uneasy over the EU vaccination programme which is liable to delay any lifting of coronavirus restrictions.

The ISM New York business conditions index declined to 51.2 from 61.3 the previous month. The IBD consumer confidence index strengthened slightly to 51.9 for January from 50.1 the previous month with no significant impact from the data.

Markets overall were still more optimistic over the US outlook compared with the Euro-zone which continued to underpin the US currency, especially with the threat of aggressive short dollar positions being covered. There was also a continued shift in market dynamics with the dollar continuing to gain support despite a further net gain in risk appetite with expectations that the US would continue to attract strong capital inflows. Commodity currencies were also unable to make headway and the dollar posted fresh 7-week highs. In this environment, EUR/USD retreated to 2-month lows near 1.2000.

The US currency was unable to hold its best levels and the Euro recovered into the New York close, although Euro confidence remained fragile.

Talks to form a new Italian government failed on Tuesday, although expectations that the President would call ask former ECB President Draghi to form a national unity government underpinned sentiment. The dollar was held in tight ranges on Wednesday with EUR/USD trading around 1.2035.

US yields edged higher on Tuesday which helped underpin the US currency amid optimism that progress was being made on further US fiscal stimulus. Markets continued to monitor developments in Washington during the day.

The Japanese yen was able to demonstrate some resilience despite the gains in equity markets with some expectations of capital repatriation flows into Japan. There was, however, also evidence that hedge funds were continuing to cover short dollar positions against the Japanese currency.  Overall, the US currency edged higher during the day, although ranges were narrow and there was a USD/JPY retreat from 11-week highs to near 105.00 at the New York close.

There were indications that Democrat Senator Manchin would vote in favour of the budget plan which helped underpin risk appetite. The Senate agreed a resolution which could ensure faster progress through Congress, although there was no Republican support. Treasury Secretary Yellen stated that fresh aid is desperately needed.

China’s Caixin PMI services index slowed retreated to a 9-month low of 52.0 from 55.8 previously and well below consensus forecasts. The data maintained some reservations over the outlook and the yuan weakened amid new-year dollar demand. Risk appetite held firm and USD/JPY traded fractionally above 105.00.

There were no significant UK data releases during Tuesday with markets still uneasy over developments within the services sector amid coronavirus restrictions.

In this context, there was also still an element of caution ahead of Thursday’s Bank of England policy meeting with some speculation that the bank could signal that negative interest rates were a possible option. Trade friction was also a significant factor.

The UK currency was able to gain only limited further support from the strong tone in global risk appetite, although there was a significant element of resilience.

GBP/USD again failed to hold above 1.3700 and gradually moved lower amid the robust US dollar tone. GBP/EUR hit fresh 8-month highs above 1.1350 before attempting to recover slightly. The UK currency did secure buying support on dips and the global risk tone continued to provide underlying support.

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