Currency Report 14 January 2016.

EUR/USD The Euro retreated towards 1.0800 against the dollar during the European session on Wednesday with some selling related to improved risk appetite. There was no break below this level with markets still wary over chasing the single currency lower, especially given recent technical strength in the 1.0800 area. Weak Euro-zone industrial production data had little impact.  Richmond Fed President Rosengren stated that economic developments since the December rate increase raised the possibility that growth was slowing and could force the Fed into increasing interest rates at a more gradual pace than expected. The comments were no real surprise, especially as he is on the dovish end of the FOMC spectrum and comments from key officials will continue to be monitored closely over the next few days. The Euro rallied back above 1.0850 with evidence of short covering after the failure to break lower. The Fed’s Beige reported modest to moderate growth in most districts while the labour market remained firm, but there were manufacturing stresses from a strong dollar. There was no significant evidence of pricing pressures and inflation expectations will continue to dip lower given the decline in energy prices. Markets overall were doubtful whether the Fed could tighten four times this year. The Euro pushed higher later in the US session as risk conditions deteriorated once again and challenged the 1.0900 area before edging weaker once again as risk conditions dominated.
JPY  The dollar was unable to break above 118.50 against the yen on Wednesday and drifted lower while finding support just below 118.00 as ranges narrowed once again. Although there was some underlying recovery in risk appetite in Europe, markets remained uneasy over conditions, especially with oil prices unable to sustain their best levels. US bond yields also failed to hold their best levels with benchmark yields initially dipping back to the 2.10% area and then below this level. As equity markets moved lower again, there was a dollar retreat back below 118.00 against the yen.  Bank of Japan Governor Kuroda stated that the bank will do whatever it takes to achieve the 2% inflation target. As far as economic data is concerned, there was a 14.4% decline in core machinery orders, reversing recent improvements, while producer prices fell 3.4% in the year to December. The dollar dipped to lows near 117.30 as risk appetite deteriorated and equity markets retreated before rallying back to 117.85 late in the Asian session.
GBP  Sterling was able to find support just below 1.4400 against the dollar on Wednesday, although the overall tone was still fragile with no recovery above 1.4500. A slightly firmer tone surrounding risk appetite and tentative recovery in oil prices provided some net UK currency support, although sentiment tended to deteriorate again late in Europe as equity markets were subjected to further selling. There were further structural concerns surrounding the UK outlook, especially with unease over imported deflation risks which curbed underlying support. The Bank of England will announce its latest interest rate decision on Thursday with no expectations that rates will be increased. There has also been some speculation that McCafferty could abandon his call for higher rates and lead to a 9-0 decision. The policy summary will also be watched closely to assess the bank’s take on global trends and the recent Sterling performance. After weakening to 11-month lows around 0.7570 against the Euro, there was a small recovery on Thursday.
CHF The franc was on the defensive against major currencies during the European session with some suspicion over SNB intervention. The Euro pushed above 1.0900 for the first time in six weeks while the dollar initially advance to just above 1.0100 before fading.  National Bank member Zurbrugg reiterated that the franc remained overvalued and would tend to weaken over the medium term. He defended the use of unorthodox policy measures and also commented that the franc had not seen defensive inflows over the past few months, although markets were sceptical.
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