Risk appetite attempted to stabilise on Friday, but then deteriorated sharply in late US trading.

Risk appetite attempted to stabilise on Friday, but then deteriorated sharply in late US trading. There were fresh concerns over the impact of monetary policy tightening with Ukraine-Russia tensions also significant.

US bond yields overall edged lower during Friday. Wall Street stocks were again subjected to heavy trading late in the session with selling led by the Nasdaq index. US futures recovered slightly on Monday with Asian equities mixed.

The overall dollar performance was again mixed. The yen and Swiss franc gained fresh support as risk conditions remained crucial. EUR/USD secured a limited net advance on Friday before fading to 1.1320 as Ukraine concerns hampered the Euro. Sterling lost ground as global risk appetite dipped with GBP/USD below 1.3550. Commodity currencies also posted sharp losses as equities came under pressure.

There were further concerns surrounding Euro-zone coronavirus developments during Friday with a warning from the German health ministry that the number of daily coronavirus infections could triple by mid-February. The comments triggered an element of unease over Euro-zone developments, although risk conditions tended to dominate. Underlying confidence remained fragile during Friday as equity markets moved lower. The dollar secured an element of defensive demand, although there was also a reluctance to engage in Euro shorts with a covering of carry trades funded through the Euro also a feature.

Markets continued to monitor the Russia-Ukraine developments given the potential impact across European asset prices and overall risk appetite.

Euro-zone consumer confidence declined marginally to -8.5 for January from a revised 8.4 previously, although this was above consensus forecasts of -9.0. The dollar secured significant net gains against commodity currencies but was unable to advance against the Euro with EUR/USD settling around 1.1340 late on Friday.

CFTC data recorded an increase in Euro long positions to over 24,500 in the latest week from 6,000 previously and the largest position since September 2021, limiting any scope for further Euro support on position adjustment.

There will be caution ahead of Wednesday’s Federal Reserve policy statement with investment banks expecting a clear signal that rates will be increased at the March meeting. There were further concerns over the situation in Ukraine on Monday and EUR/USD edged lower to 1.1320 on Monday as caution prevailed.

US Treasuries continued to recover on Friday with fresh demand for safe-haven assets as risk appetite remained fragile. The 10-year yield dipped below 1.80% which tended to sap dollar support while there was further defensive yen demand.

There was some speculation that the Federal Reserve could adjust its language slightly at next week’s policy meeting given the recent signs of vulnerability in risk appetite. In this environment, the dollar was remained on the defensive and USD/JPY traded around 113.65 as Wall Street equities continued to retreat.

CFTC data continued to record a substantial short yen position, maintaining the potential for short covering.

The Japanese PMI manufacturing index strengthened to a 4-year high of 54.6 for December from 54.3 previously while the services-sector index dipped to 46.6 from 52.1 amid the Omicron outbreak. Asian equities were mixed on Monday while US futures recovered some ground which limited scope for further yen buying.

USD/JPY advanced to highs near 114.00 before stalling with EUR/JPY around 128.85.

In comments on Friday, Bank of England Monetary Policy Committee member Mann stated that inflation data since November have not been consistent with stabilisation and that the ingredients are in place for inflation to remain strong for a longer period of time with residual wage and price strength likely to persist. She also noted that if demand-supply imbalances seen in 2021 continue, there could be another surge in wages and prices. She also stated that global inflation pressures could force the UK to tighten more than would be appropriate on domestic grounds and the bank needed to lean against expectations.

These comments were generally hawkish, although she added that the shift in financial markets could allow a shallower rate path. Sterling was unable to make any headway, especially with risk appetite remaining vulnerable during the day. GBP/USD retreated to near 1.3550 with GBP/EUR dipped towards 1.1950.

CFTC data recorded a further sharp decline in short Sterling positions to near 200 contracts in the latest week from over 20,000 previously and the smallest short position for close to three months, limiting the potential for further position adjustment with Sterling dependent on positive sentiment to make headway.

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