Comments from Fed Powell were dovish, but markets had wanted a greater commitment to curbing the increase in bond yields.

Comments from Fed Powell were dovish, but markets had wanted a greater commitment to curbing the increase in bond yields. Yields moved higher following the comments which triggered fresh concerns and risk appetite dipped sharply. Wall Street equities moved sharply lower with further selling in the tech sector.

Asian equites declined, but losses were contained as global recovery hopes continued. The dollar gained renewed support as risk appetite crumbled and hit 3-month highs. The yen and Swiss franc remained on the defensive with USD/JPY at 7-month highs.

EUR/USD dipped below 1.2000 which triggered further selling and lows near 1.1950. Sterling also retreated as GBP/USD dipped sharply after failing to hold 1.4000 with a move below 1.3900.

Commodity currencies also retreated sharply as equities declined and the US dollar recovered.

Euro-zone retail sales slumped 5.9% for January compared with consensus forecasts of a 1.1% retreat with an annual decline of 6.4%. Markets had been prepared for weak data following the very weak release from Germany. The unemployment rate was unchanged at 8.1% for January, below expectations of 8.3%.

The Euro was unable to gain any traction in European trading and drifted lower as the US dollar held a firm tone.

US initial jobless claims increased slightly to 745,000 in the latest week from a revised 736,000 the previous week, although this was slightly below consensus forecasts. Continuing claims declined to 4.30mn from 4.42mn and marginally below expectations and there was a sharp decline in the number of people receiving pandemic emergency relief with the number of people claiming under all programmes declining to near 18.0mn from 19.0mn previously, although the year-ago figure was 2.2mn.

Challenger data also recorded a decline in monthly lay-offs to 34,500 from 79,600 previously with a 39% annual decline.

The claims data helped underpin expectations surrounding Friday’s employment data with markets expecting a payrolls increase of around 200,000.

The dollar was held in relatively narrow ranges amid caution ahead of comments from Fed Chair Powell. Powell stated that there was a lot of ground to cover to reach maximum employment. He also stated that a decline in the unemployment rate to 4% would not represent full employment and it was highly unlikely that the target would be reached this year.

Powell also commented that the Fed would be concerned by disorderly conditions in financial markets and a tightening of conditions in the bond market. The Fed Chair, however, did not issue a stronger warning against higher yields and commodity currencies retreated sharply as equities moved lower.

The dollar weakened briefly after the comments before regaining ground with markets disappointed that there was a more forceful push back against bond-market losses. EUR/USD dipped below 1.2000 which triggered further selling and the dollar overall posted 3-month highs on Friday with EUR/USD just above 1.1950.

The dollar maintained a firm tone against the yen on Thursday, especially with the Japanese currency under wider selling pressure. Confidence in a global recovery remained strong which contributed to significant selling pressure on defensive currencies with the yen losing support. In this environment, USD/JPY moved above 107.50 in Europe. The IIF estimated that the dollar overall is overvalued by 11.7% with notable under-valuation for the Chinese yuan.

The dollar gained further support after Powell’s comments with fresh USD/JPY highs above 107.90 against the US currency. The Senate voted to begin debate on the $1.9trn fiscal stimulus plan with the voting along party lines, but there is liable to be a prolonged debate, limiting the chances of quick approval.

The Chinese yuan maintained a weaker tone amid a firmer US dollar tone with markets monitoring the annual meeting of parliament for comments on a growth target. The dollar overall maintained a strong tone with USD/JPY at fresh 7-month highs above 108.00 as the yen failed to derive support from fragile equity markets.

The UK PMI construction-sector index strengthened to 53.3 for February from 49.2 the previous month and above consensus forecasts of 51.0. New orders remained in positive territory and employment increased slightly. There was strong upward pressure on costs with the fastest rate of increase for 12 years with companies also facing further difficulties surrounding supply chains. Construction has been supported by the ability to remain operating during the lockdown.

Sterling overall maintained a firm tone into the New York open with expectations of further capital inflows. Although there were reservations over planned tax increases, markets there was optimism that the fiscal stance would underpin a strong near-term recovery and investment incentives could drive capital inflows.

GBP/USD strengthened to just above 1.4000 at the European close while GBP/EUR strengthened to highs just below 1.1600. Sterling also posted notable gains against the yen and Swiss franc, but there was a sharp GBP/USD rejection from 1.4000 with a slide to below 1.3900 as the dollar rallied.

The pound overall held firm on Friday with GBP/JPY close to 34-month highs and above 150.0 but GBP/USD was below 1.3900.

Economic Calendar

Expected Previous
07:00 German Factory Orders (M/M)(JAN) 0.70% -2.20%
08:30 GBP Halifax HPI (M/M)(FEB) 0.30% -0.30%
13:30 USD Average Hourly Earnings (M/M)(FEB) 0.30% 0.20%
13:30 USD Average Hourly Earnings (Y/Y)(FEB) 5.10% 5.40%
13:30 USD Non-farm Payrolls(M/M)(FEB) 50K 49K
13:30 USD Private Nonfarm Payrolls (FEB) 50K 6K
13:30 USD Trade Balance(JAN) -66.60B
13:30 United States Unemployment Rate(M/M)(FEB) 6.70% 6.30%
13:30 CAD Trade Balance(JAN) -3.00B -1.67B
14:00 Bank of England (BoE) Monetary Policy Committee (MPC) Member Jonathan Haskel Speaks
15:00 CAD Ivey PMI(M/M)(FEB) 48.4
18:00 USD Baker Hughes US Oil Count 309
20:00 USD Consumer Credit(JAN) 12.00B 9.73B
20:00 FOMC Member Raphael Bostic speech

*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.