UK Prime Minister Johnson stated that the country remained in a perilous situation.

Global equities dipped sharply ahead of Wednesday’s New York open amid position liquidation. The Fed made no changes to rates or bond purchases and remained committed to a very supportive policy to underpin inflation.

Overall risk appetite was notably weaker despite dovish Fed rhetoric which triggered a flow of funds into defensive assets. Equities remained under pressure in Asian trading on Thursday as fund liquidation continued.

The dollar continued to gain net support on defensive grounds. EUR/USD found support after a dip to 1.2060, but the Euro was hampered by fresh speculation that the ECB could cut interest rates. Sterling was resilient on vaccine hopes, but did retreat as risk appetite dipped with GBP/USD near 1.3650. Commodity currencies moved in tandem risk conditions and posted significant losses.

German consumer confidence declined sharply to -15.6 for January from -7.5 the previous month and well below consensus forecasts. The Euro was unable to make any headway in early Europe on Wednesday and losses gradually accelerated into the New York open.

There was further evidence of the ECB stepping-up potential protests against Euro strength. Council member Knot stated the bank would closely monitor recent Euro strengthening and determine its impact on inflation. He added that the bank could cut the deposit rate further if that proved necessary to keep the inflation target in sight.

There were also reports that ECB officials consider that markets are underestimating the odds of a rate cut. The overall developments over the past 24 hours increased speculation that the bank was making a more determined effort to curb Euro strength which undermined the single currency amid a covering of long positions.

The Euro was undermined by a developing row between the EU and Astra Zeneca over the supply of coronavirus vaccines and EUR/USD retreated to lows near 1.2060.

There was no significant impact from data releases and the Euro gradually recovered with EUR/USD back above 1.2100 as equity markets recovered ground and the dollar lost support.

The Federal Reserve held interest rates in the 0.00-0.25% range, in line with expectations, and there were no changes to the asset-purchase programme with Treasury purchases of at least $80bn per month. The statement was little changed with the committee reiterating that the accommodative policy will continue until inflation runs moderately above 2% for some time in order to reach the average target of 2%. According to the Fed, the on-going public health crisis continues to weigh on activity.

Fed Chair Powell reiterated that monetary policy would continue to provide powerful support and that the economy was a long way from the Fed’s goals. He also repeated that any short-term inflation increase would be transient and that talk of tapering is premature. The dollar resisted losses despite Powell’s dovish rhetoric as risk appetite deteriorated and commodity currencies moved sharply lower. The US currency held firm on Thursday with EUR/USD just below 1.2100.

Risk appetite started to deteriorate early in the European session on Wednesday. There was initial unease over the risk of reduced Chinese liquidity which would tend to tend to have a negative impact on global asset prices. US equity futures dipped sharply at the US open which triggered a further sharp slide in risk appetite. The yen was unable to secure significant support and USD/JPY moved above the 104.00 level amid wider US gains.

US durable goods orders increased 0.2% for December after a 1.2% increase previously and below consensus forecasts of 0.9% while core orders increased 0.7%.

Bond yields declined following the Fed policy meeting and equities continued to weaken in choppy trading with USD/JPY held just above 104.00. Equity markets continued to move sharply lower with reports that hedge funds were liquidating long positions to offset losses on forced short covering. The Vix volatility index also rose sharply. Chinese equities remained on the defensive on Thursday with the dollar continuing to gain net support as USD/JPY strengthened to near 104.30.

Sterling retreated against the US dollar ahead of Wednesday’s New York open as the US currency secured fresh defensive demand.  Overall losses were limited with the currency notably resilient even with a slide in risk appetite. The Euro was also subjected to renewed selling and GBP/EUR retreated from 8-month highs near 1.1350.

UK Prime Minister Johnson stated that the country remained in a perilous situation and that it would not be possible to re-open schools before March 8^th. The unease over near-term damage to the UK economy was offset by optimism over the vaccine programme and reduced expectations of negative UK interest rates.

GBP/USD briefly moved back above 1.3700 before retreating again as the slide in equities triggered fresh US currency demand.

Markets will be wary over month-end position adjustment over the next 36 hours which could contribute to choppy trading.

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