Sterling held a firm tone with GBP/EUR hitting fresh 23-month highs before stumbling as risk appetite deteriorated.

Risk appetite dominated and conditions were stronger in Europe on Thursday. US bond yields edged lower after a larger than expected increase in jobless claims and US equities moved higher.

There was a sharp reversal late in New York with Wall Street equities declining sharply as tech stocks posted renewed losses. Risk appetite remained more fragile in Asia on Friday with net losses in regional bourses.

The dollar recovered from intra-day lows against the Euro and risk currencies. EUR/USD was unable to hold above 1.1350 and retreated. The yen posted strong gains as equities slumped with USD/JPY declining to below 114.00. Sterling held a firm tone with GBP/EUR hitting fresh 23-month highs before stumbling as risk appetite deteriorated. GBP/USD traded below 1.3600 as UK retail sales also slumped.

Commodity currencies failed to hold gains and retreated sharply as risk conditions dominated.

The Euro was hampered to some extent by a further increase in French coronavirus cases. In comments on Thursday, ECB President Lagarde stated that the central bank has no need to act as fast as the Federal Reserve on monetary policy, although she also noted that the bank stood ready to respond if necessary.

There was evidence of divisions within the ECB minutes as a number of policymakers argued that inflation was at risk of over-shooting expectations. There were also comments that a higher for longer inflation scenario cannot be ruled out and the bank must be prepared to adjust policy in either direction.

US initial jobless claims increased sharply to 286,000 in the latest week from a revised 231,000 previously and well above consensus forecasts of 220,000. Continuing claims also increased to 1.64mn in the week from a revised 1.55mn and also above market expectations.

The Philadelphia Fed manufacturing index strengthened to 23.2 for January from 15.4 previously and above consensus forecasts of 20.0.  There were slightly stronger readings for shipments and new orders while employment continued to increase, although the rate of growth slowed. The prices paid index strengthened further on the month while there was a slight easing of upward pressure on prices received. Companies overall were more confident over the outlook with pricing pressures expected to remain very strong. The Philly Fed data offered reassurance over the outlook, but there were some reservations over the labour market after the claims data.

There was indecisive trading in early New York, but the dollar gradually recovered ground and posted stronger gains as risk appetite deteriorated with EUR/USD dipping to near 1.1300.

Markets will monitor US-Russia talks over Ukraine on Friday with risk conditions having an important impact and EUR/USD around 1.1325 with an element of carry-trade liquidation limiting selling pressure.

US Treasuries secured limited gains after the US jobless claims data with yields edging lower which limited potential dollar support.

Existing home sales declined to an annual rate of 6.18mn from 6.44mn previously. Lower US yields sapped near-term dollar backing and the yen was notably resilient despite a sharp rebound in equity markets.  In this environment, the dollar dipped to lows at 114.00 towards the European close.

Wall Street equities dipped sharply late in the session, although USD/JPY was able to hold above the 114.00 level.

Japan’s CPI inflation rate increased to 0.8% for December from 0.6%, but below consensus forecasts of 0.9% while the core rate was -0.7% from -0.6% previously.

Risk conditions dominated on Friday with net losses in US futures and Asian bourses. The yen secured renewed defensive support with USD/JPY retreating to lows near 113.60 before a slight recovery to around 113.85 while EUR/JPY traded just below 129.0 as risk conditions dominated.

Latest data from the ONS suggested there had been a sharp dip in business activity in December, but there was evidence of a tentative rebound in the third week of January. There was also optimism that an easing of coronavirus restrictions would help underpin activity over the next few months.

Sterling held a firm tone in early Europe with further support from market expectations of a February rate hike, although around 35% of analysts are not expecting an increase. The UK currency also gained traction from a stronger tone surrounding risk appetite, although the FTSE 100 index lost ground during the day.

There were no substantive political developments during the day, although the overall atmosphere in Westminster remained extremely tense.

GBP/USD moved above 1.3650 at the European close and EUR/GBP dipped to fresh 23-month lows just above the 0.8300 level. The dollar recovered late in the day and a slide in equities after the European close sapped UK support with GBP/USD retreating to near 1.3600 and GBP/EUR dipped to 1.1990.

UK consumer confidence dipped to -19 for January from -15 previously. Retail sales slumped for December with a 3.7% monthly decline compared with expectations of 0.6% with a 0.9% annual decline from 4.7% previously. There was a muted reaction as risk conditions dominated with GBP/USD just below 1.3600.

Economic Calendar

Expected Previous
07:00 GBP Retail Sales ex-Fuel (Y/Y)(DEC, 2021) 1.10% 2.20%
07:00 GBP Retail Sales ex-Fuel (M/M)(DEC, 2021) -0.50% 0.70%
07:00 GBP Retail Sales (M/M)(DEC, 2021) -0.60% 1.00%
07:00 GBP Retail Sales (Y/Y)(DEC, 2021) 3.40% 4.30%
08:00 World Economic Forum Annual Meetings
10:00 Euro-Zone Consumer Confidence(JAN) -9 -8.3
11:00 CBI Distributive Trades Survey(JAN) 8
13:30 European Central Bank President Lagarde Speaks
13:30 CAD Retail Sales Ex Autos (M/M)(NOV, 2021) 1.30% 1.30%
13:30 CAD Retail Sales (M/M)(DEC, 2021) 1.60%
13:30 CAD New Housing Price Index (M/M) 1.00% 0.80%
13:30 CAD Wholesale Sales (M/M)(OCT, 2021) 2.70% 1.40%

*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.