Sterling continued to gain support from optimism surrounding the vaccine programme.

Risk appetite recovered from dips during Tuesday with expectations that Fed and global monetary policy would remain supportive.  Wall Street equities were held in relatively narrow ranges amid a focus on speculative plays.

The dollar overall drifted lower as equity markets pared losses, although ranges were relatively tight. EUR/USD posted limited net gains to the 1.2160 area amid caution ahead of the Fed policy. Sterling posted net gains with GBP/USD testing fresh 32-month highs near 1.3750 on underlying vaccine hopes.

Commodity currencies made significant gains, although with a retreat from best levels. Higher than expected headline inflation data failed to lift the Australian dollar.

Italian Prime Minister Conte submitted his resignation to the President, although the overall impact was measured with expectations that early elections would be avoided. Consultations between parties on the formation of a new government are due to start on Wednesday.

ECB council member Villeroy stated that inflation could exceed 2% on a temporary basis under the ECB goal and the Euro overall held steady.

US consumer confidence increased marginally to 89.3 for January from a revised 87.1 the previous month and fractionally above consensus forecasts of 89.0. There was a retreat in the current conditions component which was offset by gains in the expectations index.

The Richmond Fed manufacturing index declined slightly to 14 for January from -19 the previous month and just below market expectations. There was a slowdown in the rate of new orders growth, but employment continued to increase and prices increased at a faster pace.

Overall risk appetite stabilised during the day which curbed potential dollar demand and commodity currencies were able to generate significant traction. In this environment, EUR/USD gradually recovered to the 1.2160 area. After the European close there were reports that the ECB was querying dollar weakness despite the stronger US economy which suggested that verbal intervention could be stepped up. The impact was short lived with EUR/USD support near 1.2150 against the dollar.

There was an element of caution ahead of Wednesday’s Federal Reserve policy meeting with expectations that a dovish stance would be maintained, especially from Chair Powell. The dollar was unable to gain traction on Wednesday with EUR/USD around 1.2160 as a dip in German consumer confidence limited potential support.

US equity futures recovered into Tuesday’s New York open which curbed potential demand for the Japanese yen, although the dollar was held in very narrow ranges.

The Philly Fed non-manufacturing index recovered to -17.5 for January from -26.6 previously with a marginal increase in new orders while there was also a small increase in the number of full-time employees on the month.

Markets were continuing to monitor US fiscal policy developments as the Biden Administration and key congressional figures plotted the best way to secure a substantial fiscal stimulus. There were further concerns that the support bill could be delayed until March which hampered sentiment to some extent, although there was still important debate over the dollar implications.

Overall, USD/JPY consolidated around 103.70 at the European close as tight ranges prevailed.

Treasury Secretary Yellen was sworn in as Treasury Secretary and pledged strong co-ordination with the Federal Reserve which helped underpin risk appetite to some extent. US yields declined, however, which limited US currency support with USD/JPY held in tight ranges around 103.65 as US equity futures edged lower.

Sterling continued to lose ground in early Europe on Tuesday with little overall impact from the slightly better than expected labour-market data. As risk conditions continued to retreat, GBP/USD dipped to lows at 1.3610. There was, however, a quick recovery as overall global risk conditions stabilised.

The CBI retail sales index declined very sharply to an 8-month low of -50 for January from -3 previously and well below consensus forecasts of -26 as fresh lockdown restrictions had a negative impact. Retailers do not expect any recovery for February while the amount of orders placed with suppliers also slumped to an 8-month low.

Sterling continued to gain support from optimism surrounding the vaccine programme, especially in relation to difficulties within the EU. This offset the news that the UK coronavirus death toll had moved above 100,000. Overall UK currency sentiment held firm with support on valuation grounds.

Overall risk appetite also improved and GBP/USD moved sharply higher to trade above 1.3700 while the GBP/EUR rallied to near 1.1300.

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