EUR/USD US jobless claims data was weaker than expected with an increase to 293,000 in the latest week from 283,000 with some evidence of a less buoyant labour market. There was a recovery in the Philadelphia Fed index to -3.5 for January from a revised -10.2. Although most components improved, there was deterioration in the number of employees and workweek which caused concern over underlying trends and markets priced the chances of a March Fed tightening at below 25%. There was no surprise with the ECB policy decision as all three main interest rates were left on hold with the main refi rate at 0.05%. In his press conference, President Draghi made reference to additional downside risks evidence since the start of 2016. He commented that monetary policy would need to be examined again and possibly re-considered at March’s meeting in view of the downside risks evidence at the start of 2016. Given similar rhetoric last October, the comments inevitably fuelled speculation that there would be further monetary easing in March. Draghi commented that interest rates would likely to stay at current levels or lower for an extended period. He was optimistic that monetary policy was proving effective and improved financing conditions were helping to make the Euro-zone more resilient. There was a fresh decline in Euro-zone bond yields with 10-year German rates at a nine-month low around 0.38%. The Euro overall retreated to two-week lows below 1.0800 following Draghi’s comments, but sellers were unable to sustain the move lower and the single currency recovered back towards 1.0900 before drifting lower once again on Friday.
JPY Risk appetite improved significantly following comments from ECB’s Draghi with equity markets rallying strongly and oil prices also recovering ground. There was a recovery in US bond yields with the 10-year rate moving back above 2.00% which helped underpin US demand. In this environment, there was recued defensive demand for the Japanese currency and the dollar rallied to highs around 117.80 late in the European session. The Nikkei paper suggested that the Bank of Japan was seriously considering expanding monetary policy further given the impact of falling energy prices on inflation expectations and next week’s policy meeting will be a key focus with further speculation over additional easing. As the PBOC maintained tight control of the yuan and Japan’s Nikkei index rose strongly by over 5%, the dollar pushed above the 118.00 level as risk appetite improved.
GBP Sterling was subjected to further selling pressure during the European session with a break to fresh seven-year lows below 1.4100 against the dollar while the Euro moved to a peak above 0.7740. Risk appetite and the Euro both changed direction sharply following Draghi’s comments with the Euro retreating sharply to below 0.7650 while the UK currency rallied back above 1.4200 against the dollar as improved risk conditions triggered substantial covering of short positions. Domestically, Bank of England MPC member Weale stated that that inflation was unlikely to return to target without a marked improvement in wage growth, although he did expect wages growth to accelerate due to the fall in unemployment. He warned that a weaker exchange rate could easily offset the impact of lower energy costs. This suggests that Weale could quickly move back to a position of voting for higher interest rates. The latest retail sales and government borrowing data will be watched closely on Friday for further evidence on overall growth trends as Sterling advanced to near 0.7600 against the Euro.
CHF continued to find support on any approach towards the 1.0920 area against the franc on Thursday even when there was sustained downward pressure on the currency elsewhere and it closed above 1.0950. The dollar was able to reach a peak close to 1.0150 before some retracement as improved risk appetite curbed immediate franc demand. National Bank Chairman Jordan stated that there is no deflation danger for Switzerland, although the bank will still be very anxious to avoid fresh upward pressure on the currency.
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