Good Morning All; see now a Friday Currency Analysis.
EUR / USD
Risk conditions deteriorated sharply in early Europe on Thursday with heavy losses in equities and fresh selling in the banking sector. In this environment, there was defensive Euro demand and evidence of fresh short covering. The US latest jobless claims data was lower than expected with a decline to 269,000 in the latest week from 285,000 previously which offered some encouragement that the labour market was still firm. Prepared comments in the second part of Fed Chair Yellen’s testimony to Congress were unchanged from Wednesday. In the Q&A section she was very keen to emphasise that the Fed was looking at global developments. She stated that there was some evidence of increased wage pressures, although the signs were still tentative at this stage. Developments would continue to be monitored very closely ahead of the March FOMC meeting. Despite Yellen’s attempts to keep all options open, markets overall continued to price out the potential for any rate increases this year, especially with talk that the issue of negative interest rates would be re-examined. The Euro pushed to 16-week highs just above 1.1370 against the dollar before risk appetite improved slightly which pushed it lower. Comments from ECB officials will be monitored closely with increased pressure for more dramatic policy easing at March’s meeting. Political developments will also be watched closely ahead of a key EU summit at the end of next week.
There was extremely high volatility early in Europe on Thursday with the yen surging stronger as risk conditions collapsed and the dollar was subjected to heavy selling with lows near 111.00 against the Japanese currency. There was a large spike ahead of the US open, increasing speculation that the Bank of Japan had been intervening, although there was no confirmation of this and the yen quickly regained ground. A further sharp decline in US bond yields with benchmark 10-year rates temporarily dropped to below 1.60%, the lowest since 2012 severely undermined US support. The latest data recorded a strong increase in bond outflows from Japan which will tend to weaken the yen. Government spokesman Suga stated that financial markets will be monitored with a sense of urgency and there was speculation that the Bank of Japan would hold an emergency meeting. The Nikkei index fell close to 5% over the day as Japanese markets played catch-up following Thursday’s holiday. As overall risk appetite remained very fragile, the dollar was unable to regain the 113.00 level and moved back to the 112.00 area into the Asian close as volatility remained very high.
Sterling came under sustained pressure on Thursday as risk conditions deteriorated with fresh 12-month highs close to 0.7900 against the Euro and a slide to below 1.4400 against the dollar. There were further concerns surrounding currentaccount vulnerability and financing pressures with the trade-weighted index at 14-month lows. There were further concerns surrounding the risk-off environment and stresses in the banking sector, both factors which would be negative for Sterling. There are no market expectations of any near-term interest-rate increase and there has been further speculation that the Bank of England might have to cut rates. 10-year gilt yields fell to record lows below 1.25% before finding some support. UK markets overall did stabilise during the session as equities regained some ground, although overall sentiment was still very fragile, especially with Brexit concerns still an important feature, and volatility levels are likely to remain higher.
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