EUR/USD The Euro was able to find support above 1.0850 against the dollar even when risk appetite was generally firmer during the European session on Tuesday with a mixed performance by the US currency amid gains against emerging markets. There was a smaller than expected decline in the German ZEW index to 10.2 for January from 16.1 previously while the Eurozone current account stayed in strong surplus. The overall impact was limited with little potential impact on monetary policy. The ECB reported strong credit demand and relaxed loan standards in the latest survey underpinning confidence over the growth outlook. There will still be caution ahead of the Thursday’s ECB meeting with a particular focus on Draghi’s comments. The US NAHB housing index was unchanged at 60.0 for December which had little impact with markets still focussing on the prospects for the US economy as a whole. The housing data and latest consumer inflation data will be watched closely on Wednesday for further evidence on the outlook for housing and inflation which will have a significant impact on Federal Reserve expectations with increasing doubts whether there would be scope for further rate hikes. After finding support above 1.0850 against the dollar, the Euro was boosted by strong demand on the Sterling cross and there was a significant move later in the European session with the currency extending gains to highs just above 1.0950 on Wednesday as risk appetite deteriorated once again and curbed any Euro selling.
JPY The dollar was unable to hold above the 118.00 against the yen on Monday and it drifted weaker as equity markets struggled to sustain initial gains. The US currency also gained only limited support from reports that the Chinese Securities Journal had recommended a cut in Reserve Ratio Requirements (RRR) and interest rates. The Bank of Japan suggested that it was disappointed with the wage talks with employers and that this could lead to a downgrading of inflation forecasts. There was a decline in the monthly Tankan index to 6 for January from 9 previously, maintaining unease over the domestic outlook. The dollar initially found some support below the 117.50 level, but confidence deteriorated sharply during the Asian session Wednesday with oil prices hitting fresh 13-year lows while there the Nikkei index retreated to the lowest level since October 2014. In this environment, the dollar retreated back below the 117.00 level.
GBP Headline UK CPI data was slightly higher than expected with the annual rate at 0.2% for December from 0.1% while the core rate rose to 1.4% from 1.2% and producer prices fell less than expected. Although energy prices have fallen, the data will dampen expectations that inflation will fall sharply. Sterling edged higher after the data before quickly losing ground again Bank of England Governor Carney stated that now was not the right time to raise interest rates given the decline in energy prices and uncertainties surrounding global growth trends, notably in China. Domestically, he also made reference to the slowdown in earnings growth. Carney was anxious to point out the differences between the US and UK outlook with rises in labour costs and a much tighter fiscal policy in the UK with generally very dovish comments. Sterling dipped sharply lower exacerbated by a drop through 2010 technical lows around 1.4225 against the dollar. As selling intensified it dropped below 1.4150 against the dollar, the lowest since March 2009 as the Euro spiked to fresh 12-month highs above 0.7700 with further losses against the Euro on Monday as risk appetite deteriorated again.