Washington political developments had little impact as President Trump was impeached.
Overall risk appetite held steady on Wednesday with dovish comments from key Fed officials providing reassurance to risk assets. Equities were held in narrow ranges with net gains for Wall Street equities providing global support.
Washington political developments had little impact as President Trump was impeached. US bond yields declined which had some impact in curbing dollar demand, but European currencies faded.
The Euro was unsettled by Italian political tensions and ECB comments with EUR/USD retreating to below 1.2150. GBP/USD retreated from 32-month highs amid fundamental reservations with EUR/GBP recovering from 7-week lows.
Commodity currencies recovered from intra-day lows amid global recovery hopes. The Canadian dollar posted gains with USD/CAD below 1.2700.
ECB President Lagarde stated that December’s economic projections were still clearly plausible and that some important uncertainties had been removed. She also commented that the central bank would be extremely attentive to the exchange rate impact on prices while reiterating that there is no currency target. The rhetoric had some limited impact in curbing euro support as EUR/USD moved lower. Council member Villeroy also stated that the bank was monitoring the exchange rate with particular attention.
There were some concerns over the Italian political situations as the coalition was close to collapse after Renzi’s centre-left party pulled out of the coalition, although the overall market impact was limited as Italian bond yields actually declined on the day.
US consumer prices increased 0.4% for December from 0.2% previously with the year-on-year rate at 1.4% from 1.2% previously and slightly above consensus forecasts of 1.3%. Underlying prices increased 0.1% which met market expectations and the annual rate held steady at 1.6%. The data had little impact on inflation expectations with markets expecting a notable increase in headline rates during the second quarter as low 2020 due to base effects.
St Louis Fed President Bullard stated that he did not want to put specific dates on any tapering of bond purchases. Governor Brainard stated that the central bank was prepared to step-up the rate of bond purchases if necessary while the new inflation framework prevents the need to tighten pre-emptively. Vice-Chair Clarida stated that the bank wanted inflation to be above 2% for a year before any tightening.
Markets will monitor comments from Fed Chair Powell closely on Thursday with a particular focus on whether he pushes back against the less dovish rhetoric from some regional officials. The dollar held firm on Thursday with EUR/USD below 1.2150 in subdued conditions while commodity currencies posted net gains which limited the scope for wider US currency support.
US bond yields edged lower on Wednesday which curbed the potential for dollar buying. US equity futures were little changed into the New York open with USD/JPY edging higher to near 104.00, although overall ranges were relatively narrow as tight ranges prevailed in equities. The House of Representatives voted to impeach President Trump for the second time with 10 Republicans voting for the motion with a potential Senate debate next week.
There was strong demand at the latest 10-year bond auction which pulled yields down and also limited the potential for further dollar support.
The Fed’s Beige Book of economic activity stated that activity increased modestly, although the employment picture was mixed. There were also widespread reports of price increases in the survey with increased costs for materials and shipping. Overall, USD/JPY consolidated just below the 104.00.
Details of President-elect Biden’s economic stimulus plan are due to be unveiled on Thursday with the bond market reaction watched closely. China’s exports increased 10.9% in the year to December, above consensus forecasts, although imports remained weak. USD/JPY overall edged higher to just above the 104.00 level.
GBP/USD pushed to re-test 32-month highs at 1.3700 on Wednesday, but was unable to break above this resistance area and corrected lower. GBP/EUR also made gains after making 7-week highs near 1.1250 ahead of the New York open.
There was further evidence of some moderation in the rate of new coronavirus cases with a figure below 48,000, but the number of deaths hit a record high at over 1,500 on the day. Prime Minister Johnson warned that restrictions could be tightened further while there were minor changes to regulations in Scotland.
The UK currency was still able to secure some support from optimism over the vaccine programme with the currency also undervalued against other majors.
There were still important reservations over underlying UK fundamentals. Sterling lost ground into the European close with a GBP/USD retreat to near 1.3620 while GBP/EUR recovered to 1.1220. The UK currency held firm on Thursday as vaccine optimism provided an element of support with GBP/EUR just above 1.1220.
|13:30||USD Export Price Index (M/M)(DEC, 2020)||30.00%||0.6|
|13:30||USD Import Price Index (M/M)(DEC, 2020)||0.10%|
|13:30||USD Continuing Jobless Claims||5061K||5072K|
|13:30||USD Initial Jobless Claims||795K||787K|
|16:00||FOMC Member Raphael Bostic speech|
|17:30||USD FOMC Member Powell Speech|
|18:00||FOMC Robert Kaplan Speech|