The dollar posted a marginal fresh 2-month high amid expectations of further short covering.

Tight ranges prevailed on Wednesday with a lack of fresh incentives and a lack of commitment. Wall Street equities edged higher, although there was a more cautious tone in Asia with a substantial amount of good news priced in. Overall risk appetite was also slightly more cautious on Thursday.

The dollar posted a marginal fresh 2-month high amid expectations of further short covering, although moves were limited. EUR/USD found support close to 1.2000, but failed to pull away from this area. Sterling lost ground with caution ahead of Thursday’s Bank of England policy statement. Commodity currencies drifted as US dollar gains offset higher domestic yields.

The final Euro-zone PMI services-sector reading was revised to 45.4 from the flash reading of 45.0 despite a slight downgrade for Germany. The Italian reading was significantly stronger than expected, although the Spanish index was below market expectations as coronavirus restrictions continued to bite.

The Euro-zone CPI inflation rate increased sharply to 0.9% from -0.3% previously and above consensus forecasts of 0.6% while the core rate also moved sharply higher to 1.4% from 0.2% previously. The rate was pushed up by a reversal in German tax cuts, higher energy prices and various logistics difficulties while the closure of stores curbed normal seasonal price discounting. Markets did not expect that the data would have any impact on ECB policy, although the sharper than expected increase could trigger some unease over more hawkish elements within the council.

US ADP employment data recorded an increase in private-sector employment of 174,000 for January after a revised 79,000 decline for December and above market expectations of 50,000. The ISM non-manufacturing index strengthened to 58.7 from 57.7 previously and above consensus forecasts of 56.8. New Orders also increased at a faster pace, although production growth slowed slightly. After contraction in December, there was a significant increase in employment for the month. The employment data overall provided some optimism over Friday’s payrolls report.

The Italian President asked former ECB President Draghi to make an attempt to form a new coalition government which provided only very limited Euro support.

EUR/USD dipped to fresh 2-month lows just above 1.2000 before making a limited recovery as traders attempted to defend the 1.2000 level. The dollar maintained a firm overall tone and the Euro drifted lower again on Thursday with a further EUR/USD test of 1.2000 and a break lower could trigger sharp losses as stops are taken out.

US Markets continued to monitor US fiscal policy developments closely. President Biden indicated that he was willing to limit the eligibility criteria for individual cheques which may make it easier to broker bipartisan agreement within Congress. There were also procedural votes to accelerate the process which underpinned sentiment.

The dollar was again held in very tight ranges and USD/JPY consolidated just above the 105.00 level as US sentiment held firm.

US long-term bond yields moved higher with the 30-year yield increasing to 11-month highs above 1.9% which provided some dollar support, although short-term yields remained at low levels. Chicago Federal Reserve President Evans stated that he was optimistic over the outlook, but that inflation was too low. He also stated that it was critical that the Fed sees through temporary price increases and not even think out adjusting policy.

China’s yuan posted slight gains on Thursday, although overall volatility remained low. USD/JPY overall posted a net advance to fresh 11-week highs the 105.20 area

The final reading for the UK services PMI index was revised to 39.5 from the flash reading of 38.8, but his still indicated notable contraction as the coronavirus restrictions continued to undermine activity. There was little overall impact as markets had priced in near-term weakness in the services sector.

Sterling volatility remained low during the day, especially with a reluctance to take on additional positions ahead of Thursday’s Bank of England policy meeting.

Sterling drifted lower against the firm US dollar with GBP/USD lows near 1.3620 and slightly above the lows recorded on Tuesday. GBP/EUR found resistance close to 1.1370 and dipped slightly.

Markets expect no policy changes at this meeting, but confidence in the outcome is low and rhetoric will be watched very closely with a particular focus on remarks surrounding negative interest rates given that the bank is expected to announce the results of its operational study into negative rates.

Economic Calendar

Expected Previous
09:00 ECB Economic Bulletin
09:30 GBP PMI Construction(DEC, 2020) 55 54.7
10:00 Euro - Zone Retail Sales (M/M)(DEC, 2020) -3.40% -6.10%
10:00 Euro - Zone Retail Sales (Y/Y)(DEC, 2020) 0.80% -2.90%
12:00 BOE MPC Vote Cut(FEB 01, 2020) 0
12:00 BOE MPC Vote Hike(FEB) 0
12:00 BOE MPC Vote Unchanged(FEB) 9 9
12:00 BoE QE Purchase Target(M/M)(FEB) 875B 875B
12:00 BoE Rate Decision(M/M)(FEB) 0.10%
13:30 Nonfarm Productivity (Q/Q) 5.60% 4.60%
15:00 USD Factory Orders(JAN) 1.00%
21:30 AUD AiG Performance of Service Index(DEC, 2020) 52.9

*All rates shown are indicative of interbank rates and should only be used for indication purposes only. It is important to note that foreign exchange rates fluctuate and that rates may vary depending on the amount and the base currency that is purchased or sold. Rates are correct as of 8:00am UK time. CentralFX are not responsible for the rates shown.