Dollar retreated amid fresh support for reflation trades, but regained some ground on Friday amid US growth expectations and higher yields.

The ECB will increase the pace of bond purchases over the next three months to curb upward pressure on yields. The Euro briefly dipped lower, but regained ground later in the day.

Wall Street equities posted gains with a record high for the S&P 500 index. Risk appetite remained firm with stability in bonds underpinning confidence, although there was greater caution on Friday.

The dollar retreated amid fresh support for reflation trades, but regained some ground on Friday amid US growth expectations and higher yields. The yen lost ground in Asia with USD/JPY near 109.00. EUR/USD pushed to near 1.2000 before fading to below 1.1950. Sterling held steady, but failed to extend gains with GBP/USD selling at 1.4000.

The Euro held a firm tone into Thursday’s New York open with EUR/USD moving above 1.1950 as the dollar remained generally on the defensive.

The ECB made no changes to interest rates. Bank President Lagarde stated that the overall economic situation is to improve in 2021, but uncertainty remains. She also noted that the inflation pick-up is mostly due to transitory factors, although projections also see a gradual increase in underlying inflation pressure. The 2021 inflation forecast has been revised up to 1.5% from 1.0% previously, but with only a marginal increase in the 2022 forecast to 1.2% from 1.1%.

As far as yields are concerned, he added that market rates do pose a risk to wider financing conditions and could lead to premature tightening. Although the total envelope for bond purchases was unchanged, Lagarde also stated that the pace of bond buying would be significantly faster in the next quarter with the rate of increases increasing immediately, although she denied that there was any intention to engage in more formal yield curve control.

US initial jobless claims declined to 712,000 in the latest week from a revised 754,000 the previous week and below consensus forecasts of 725,000. Continuing claims also declined to 4.14mn from 4.34mn. There was, however, a sharp increase in pandemic assistance claims of over 2.0mn on the week with total claims over 20.0mn.

There were expectations of strong US growth, especially with a very strong fiscal stimulus with mixed implication for the dollar.

The Euro was hampered by further difficulties over the Euro-zone vaccination programme amid persistent supply difficulties. EUR/USD retreated to 1.1930 after the ECB PEPP move, but the dollar was unable to gain sustained support and the pair strengthened to daily highs near 1.1980 at the European close. EUR/USD was unable to challenge the 1.2000 area and retreated to just below 1.1950 on Friday as growth hopes underpinned the US currency.

Chinese US bond yields edged higher after the New York open as the jobless claims data maintained expectations of a strong economic rebound.

The dollar was able to gain only limited support and USD/JPY dipped back to just below 108.50 at the European close.

The $1.9trn economic support package was formally signed into law with individual cheques expected to be sent out shortly. Equity markets maintained a robust tone with the S&P 500 index posting a fresh record high after a 1.0% daily advance.

There were rumours that the Bank of Japan would drop the formal target for Exchange Traded Funds (ETF) funds, although the upper limited might be maintained.

US equity futures edged higher in Asia and Japan’s Nikkei index posted strong gains, although Asian markets overall were mixed. Firm risk appetite curbed demand for defensive assets which also sapped potential yen support. USD/JPY strengthened to the 108.85 area while EUR/JPY edged above the 130.0 level.

Overall confidence in UK economy remained robust during Thursday with expectations that there would be a strong recovery as lockdown measures are eased.

There was no significant market impact from the news that the Astra Zeneca coronavirus vaccine had been halted in several countries, including Norway and Denmark due to concerns over potential blood clots. There were no indications of any concerns over the UK programme.

GBP/USD gradually gained ground with highs around 1.3980 towards the European close. Sterling was, however, unable to make further headway on the crosses despite further gains on Wall Street with a decline in the FTSE 100 index having some negative impact.

GBP/EUR settled around 1.1675 after again finding support close to 1.1650 with Sterling also failing to advance further against the Japanese yen.

UK GDP declined 2.9% for January compared with expectations of a 4.9% decline, although there was a sharper than expected decline for industrial production and trade volumes declined sharply.

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