The Pound attempted to break above the 1.3700 mark on the Dollar (last seen over 2.5 years ago) but corrected lower and the Euro dipped to 7-week lows near 1.1260 before levelling out as the US market opened.
UK coronavirus cases seemed a little better with a figure below 48,000, but mortalities hit a record high of over 1,500 on the day. Boris Johnson warned/hinted/alluded that restrictions could be tightened further and regulations in Scotland were actually tightened slightly. Sterling gained some support from vaccine optimism with the currency also undervalued against other majors. Concerns remain over the underlying UK economic fundamentals. As the European market drew to a close Sterling retreated to near 1.3620 on the Dollar while the Euro recovered to 1.1200 The Pounds opens firmly this morning, at 1.1235 on the Euro as vaccine optimism continues.
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 by 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 Federal reserve (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-President 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 Euro rallied to over 1.2220 yesterday but fell short of further gains against the Dollar. The single currency has been broadly on the back foot, despite stronger than expected Industrial Production numbers for the Eurozone for November.
With comments made on Wednesday, ECB President Lagarde stated that December’s economic projections were still plausible and that some important uncertainties had been removed. She also went on to comment 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. Council member Villeroy also stated that the bank was monitoring the exchange rate with particular attention.
There were also 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.
As of writing, the Euro currently trades around the 1.2155 mark against its US counterpart.
Data to watch
18:30 - USD - Fed Chair Powell Speaks
Posted in Daily Market News on Jan 14 2021