Risk appetite was less confident during Monday amid unease over near-term coronavirus developments.

Risk appetite was less confident during Monday amid unease over near-term coronavirus developments. European equities were hurt by the German IFO data while US equities were mixed.

Risk appetite and equities dipped in Asia on Tuesday amid fresh valuation concerns and fiscal uncertainty. The weaker German IFO data undermined the Euro with Euro-zone vaccine developments also a concern.

The dollar was able to secure limited relief and also garnered some defensive support with EUR/USD retreating to 1.2120. Sterling edged slightly lower as vaccine hopes offset the impact of weaker risk conditions with GBP/USD below 1.3700. Commodity currencies posted measured net losses amid fragile risk conditions.

The German IFO business confidence index declined to 90.1 for January from 92.2 the previous month and significantly below forecasts of 91.8. The current conditions index dipped to 89.2 from 91.3 previously while the expectations index also weakened to 91.1 from 93.0 with both metrics also well below market expectations.

Confidence in the short-term euro-zone outlook dipped further following the IFO data with fears that there would be a further loss of short-term traction.

The latest Reuters survey expected that the German economy would reach pre-crisis levels in mid-2022.

The Euro was also undermined by unease over the near-term coronavirus rollout in the region, especially following reports that initial deliveries of the Astra Zeneca vaccine would be lower than expected. There was also a further row between the EU and vaccine suppliers.

ECB chief economist Lane reiterated that the full central bank PEPP bond-buying envelope need not be used if favourable financing conditions can be maintained. The repeat of slightly more hawkish elements in last week’s statement could provide an element of Euro support.

There was, however, a dip in risk appetite towards the European close and the US dollar regained some ground as commodity currencies lost ground. Overall, EUR/USD retreated sharply to lows below 1.2120 before a tentative recovery with markets monitoring global risk.

There were also reports that Italian Prime Minister Conte would resign, although the currency impact was limited. The dollar overall maintained a firm underlying tone, especially as weaker risk appetite triggered fresh demand and EUR/USD was unable to gain traction to trade around 1.2125.

US Administration coronavirus expert Fauci warned over the logistics issues surrounding the vaccine programme and also expressed some concerns over potential delays to the second vaccine dose. Merck announced that it was shutting down its vaccine programme after weak results. Risk appetite was more cautious at the New York open with significant losses in European equities. Wall Street indices also moved lower which provided an element of Japanese yen support.

US bond yields moved significantly lower on the day which stifled potential US dollar support. Markets expected a dovish stance from the Federal Reserve at Wednesday’s policy meeting which curbed potential pressure on equities to some extent.

Yellen was approved as Treasury Secretary in the Senate with 84 members voting to back the nomination and there was also evidence of potential bi-partisan support for the Biden fiscal package. Nevertheless, overall risk appetite weakened on doubts whether over the extent of support and concerns that a substantial amount of positive news had been priced in.

Chinese offshore forward rates moved sharply higher and there were also reservations over US-China tensions in the South China Sea. Overall, US equity futures moved significantly lower and Asian markets also declined with USD/JPY held around 103.70 as the yen gained some defensive support.

Sterling

GBP/USD failed to hold a move above 1.3700 in Europe on Monday and the fresh failure to hold above resistance was a significant factor in eroding support and the UK currency also failed to make further headway against the Euro. The UK currency gained an element of support from optimism over the UK vaccine programme, especially given concerns over near-term difficulties surrounding vaccine programmes in the Euro-zone and US with GBP/EUR near 1.1260.

There were still some reservations over the potential for another Scottish referendum as the issue continued to gain an element of traction.

GBP/USD dipped to 1.3650, but was broadly resilient even when there was a dip in global equities. UK unemployment increased to 5.0% in the three months to November from 4.9% and below expectations of 5.1% while the universal claimant count increase was held at 7,000.

Economic Calendar

Expected Previous
07:00 GBP Average Earning Including Bonus(NOV, 2020) 2.90% 2.70%
07:00 GBP Claimant Count Change(M/M)(DEC, 2020) 35.0K 64.3K
07:00 GBP Unemployment Rate(NOV, 2020) 5.10% 4.90%
08:00 World Economic Forum Annual Meetings
11:00 CBI Distributive Trades Survey(JAN) -3
14:00 US House Price Index (M/M)(NOV, 2020) 1.50%
15:00 USD CB Consumer Confidence(JAN) 97 88.6

*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.