Sterling maintained a strong overall tone with GBP/EUR at 9-month highs.

US retail sales data was much stronger than expected and producer prices data was also above forecasts.

Risk appetite was less confident with fresh reservations over the risk of higher inflation. Fed minutes curbed fears over any short-term central bank policy shift. Wall Street equities still edged lower with a lack of conviction in global bourses.

The dollar gained ground following the US data before fading slightly. EUR/USD dipped below 1.2050 before stabilising with the Swiss franc edging lower. Sterling maintained a strong overall tone with GBP/EUR at 9-month highs before a limited correction. Commodity currencies retreated as the US dollar advanced, but pared losses after the Fed minutes.

The Euro was unable to make any headway ahead of Wednesday’s New York open and drifted lower as the dollar maintained a slightly firmer tone. The German health ministry stated that coronavirus variants are spreading quickly in the country which created some caution, although overall infections were still declining.

US retail sales jumped 5.3% for January after a revised 0.7% decline the previous month and substantially above consensus forecasts of 1.1%. Underlying sales increased 5.9% on the month following a 1.8% decline previously while the control group recorded a sharp 6.0% monthly gain.
Producer prices (PPI) data was also much stronger than expected with a 1.3% January increase after a 0.3% gain the previous month. Core prices increased 1.2% on the month with a 2.0% annual increase from 1.2% previously and above expectations of 1.1%.

The retail sales data boosted confidence in the US growth outlook, especially with a decline in coronavirus infection rates. The PPI data also increased concerns over an underlying increase in inflation pressures. This combination provided further dollar support with EUR/USD retreating to lows around 1.2025 at the European close.

Minutes from January’s Federal Reserve meeting noted that the economic outlook had improved considerably from December’s meeting. The committee reiterated that the accommodative monetary stance would continue until the Fed goals had been achieved. Many officials expressed the need to distinguish between one-time price trends and underlying inflation trends, although several participants saw upside risks to inflation from supply constraints.

The dollar was unable to gain further support following the minutes with EUR/USD recovering slightly to 1.2040 as commodity currencies pared losses. Narrow ranges prevailed on Thursday ahead of Friday’s Euro-zone PMI business confidence data due on Friday with EUR/USD just below 1.2050 amid a marginally softer dollar tone.

US yields moved higher immediately after the US data releases, but failed to sustain the advance which limited the potential for further support for the US dollar. Wall Street equity markets also moved lower which limited the scope for further yen selling and USD/JPY hit selling interest above the 106.00 level.

US industrial production increased 0.9% for January, above consensus forecasts of 0.5% while the NAHB housing index edged higher to 84 from 83 previously.

Boston Fed President Rosengren stated that there is still a lot to do to fix the labour market and that all major inflation measures are quite low. He added that he would be surprised if there is a sustained rate of 2% within the next year or two. Overall, the dollar settled around 105.85 at the New York close.

Japanese Prime Minister Suga met with Bank of Japan governor Kuroda and there were reports that Suga pushed for a very expansionary central bank policy. Overall ranges were narrow on Thursday with USD/JPY just below the 106.00 level while EUR/JPY retreated to near 127.50.

There was little sustained reaction to the UK inflation data with expectations that the Bank of England would make no short-term policy changes. There was further optimism over the UK vaccine programme. Prime Minister Johnson stated that lockdown would be eased in stages with a cautious approach and was keen to emphasise that the relaxations must be irreversible. He confirmed that the outline approach would be set out on Monday.

The UK currency continued to gain an element of support from firm underlying risk trends, especially with further strength in oil prices.

Wider dollar gains, pushed GBP/USD to lows around 1.3830, but there was little evidence of overall UK selling and GBP/EUR rallied to 9-month highs at 1.1430 as the UK currency was still seen as under-valued on a medium-term view.

Markets will be monitoring the latest UK business confidence data on Friday, especially as the distortions surrounding the end of the EU transition period will continue to have an impact.

Economic Calendar