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Risk appetite deteriorated on Tuesday with reservations over threat of aggressive monetary tightening by the Fed

Posted: 19th January 2022
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Trade ideas & Daily market report January 19th 2022

Market highlights.

  • Risk appetite deteriorated during Tuesday with further reservations over the threat of more aggressive monetary tightening by the Federal Reserve.
  • US bond yields continued to move higher with fresh 2-year highs for the 10-year yield on Wednesday.
  • Wall Street equities declined sharply on interest rate fears with fresh selling in the tech sector.
  • Asian equity markets also declined sharply on Wednesday, although selling was contained.
  • The dollar overall posted significant net gains on strong expectations of Fed tightening.
  • EUR/USD retreated sharply to near 1.1320 before stabilising.
  • Sterling was resilient with EUR/GBP near 23-month lows, but with no further buying after the inflation data.
  • Commodity currencies recovered from intra-day lows with some support from higher energy and metals prices.
  • Oil prices secured strong buying on dips and posted fresh 7-year highs amid supply disruptions before a limited correction.
  • Gold was hampered by a firm dollar, but silver posted strong gains.
  • Crypto assets tended to lose ground as risk appetite remained more vulnerable.

EUR/USD

The German ZEW economic confidence index strengthened sharply to 51.7 for January from 29.9 the previous month and well above consensus forecasts of 32.0. There was, however, a retreat in the current conditions component to -10.2 from -7.4 previously due to the current coronavirus restrictions.

The Euro was unable to make any headway following the data and edged lower amid a firm US dollar tone and existing yield spreads.

The New York Empire manufacturing index declined sharply to -0.7 for January from 31.9 previously. This was substantially below consensus forecasts of 25.0 and the first negative reading for 19 months. There was also a sharp decline in the new orders index to -5 from 27.1 in December while shipments secured only a marginal increase on the month. Employment increased at a slower pace on the month while inflation pressures eased slightly on the month, even though there were still notable inflation pressures in the data. Companies remained optimistic over the outlook while pricing pressures are expected to intensify.

The dollar failed to retreat and posted strong gains after the Wall Street open. The US currency was boosted by a further increase in yields and strong expectations that the Federal Reserve would tighten more aggressively this year. Commodity currencies lost ground and EUR/USD slid to near 1.1320 at the European close.

ECB council member Villeroy stated that the central bank would act if inflation proved more persistent. EUR/USD managed to stabilise on Wednesday to trade around 1.1330 with markets continuing to monitor yield trends amid some speculation that the Fed could raise rates by 0.50% at the March meeting.

USD/JPY

Japanese Prime Minister Kishida stated that he wanted to impose states of emergency on several regional from January 21st which hampered risk appetite.

Treasuries were little changed following the US data releases with the 10-year yield holding around 1.83% and close to 2-year highs. There was, however, sharp selling in US equities which underpinned defensive yen demand and USD/JPY dipped to the 114.50 area.

The US NAHB housing index declined marginally to 83 from 84 the previous month, but continued to signal a robust housing sector.

US Treasuries declined later in the session with the 10-year yield at fresh 2-year highs. The dollar, however, failed to gain fresh support, especially with further defensive yen demand as equity markets continued to decline.

US futures posted further losses to 4-week lows on Wednesday and Asian equities posted sharp losses as risk appetite remained more defensive. There was further defensive yen demand with USD/JPY retreating to 114.25 while EUR/JPY dipped to below 129.50.

Sterling

Sterling was undermined by more vulnerable risk conditions on Tuesday, especially with equity markets declining sharply with rate increases also priced in.

Expectations that the UK coronavirus restrictions would be released offered some protection to the UK currency during the day with some reports that Plan B restrictions could be scrapped in England from January 26th.  Markets also continued to monitor wider political developments as Prime Minister Johnson remained under pressure with reports of a concerted move by Conservative MPs to force a no-confidence vote.

GBP/USD dipped to lows around 1.3575 while EUR/GBP posted renewed net losses to around 0.8335 and close to 23-month lows.

The UK consumer inflation rate increased to 5.4% for December from 5.1% previously, above expectations of 5.2% and the strongest reading since March 1992. The core rate increased to 4.2% from 4.0%, maintaining pressure on the Bank of England to raise interest rates to keep inflation expectations in check.

Markets will also monitor testimony to the Treasury Select Committee from Bank of England Governor Bailey. Reaction to the data was muted with GBP/USD trading close to 1.3600 with EUR/GBP around 0.8330, although overall volatility is likely to remain elevated, especially with elevated political tensions.

Swiss franc

The Swiss franc held firm on Tuesday with an element of support from weaker equity markets, especially with a dip in European markets. The franc also gained an element of support from unease over tensions between Russia and Ukraine. In this environment, EUR/CHF retreated to near 1.0400.

USD/CHF secured net gains to 0.9170 amid the wider advance. The franc posted further gains on Wednesday as the defensive tone surrounding equities continued to provide net support. EUR/CHF dipped below the 1.0400 level while USD/CHF was held just below 0.9160.

AUD/USD + USD/CAD

The Australian dollar lost further ground on Tuesday as risk appetite deteriorated and the US dollar posted net gains, although the currency was resilient on the crosses with AUD/USD settling around 0.7185.

The Australian dollar was also broadly resilient in Asia on Wednesday despite further losses in equity markets and traded around 0.7190.

There was a similar pattern for the Canadian dollar with firm oil prices and expectations of a Bank of Canada rate hike continuing to provide net support.

Overall, USD/CAD advanced to 1.2565 before a retreat to 1.2530 and there was a further test of 1.2500 on Wednesday before consolidation around 1.2515.

NOK+ SEK

The Norwegian krone was held in relatively tight ranges on Tuesday with underlying support from firm oil prices and expectations of a hawkish Norges Bank statement on Thursday.

The krone was hampered by weaker risk appetite with EUR/NOK settling just above 9.98.

EUR/NOK traded around 9.99 on Wednesday with USD/NOK around 8.81.

The Swedish krona was hampered by weaker risk appetite during the day with EUR/SEK strengthening to around 10.35.

EUR/SEK traded slightly higher on Wednesday with USD/SEK around 9.14.

Equities

European equities lost ground on Tuesday with renewed concerns over the impact of high energy prices with Wall Street losses also an important element.

The German DAX and Eurostoxx 50 indices both declined 1.0% on the day.

Major UK stocks were undermined by weaker risk conditions on Tuesday with caution ahead of the inflation data also significant. GBP/USD losses failed to provide more than limited support with the FTSE 100 index declining 0.6%.

Wall Street equities were subjected to renewed selling on Tuesday with increased concerns over the threat of higher interest rates with another round of losses in the Nasdaq index also undermining confidence and the S&P 500 index declined 1.8%.

Futures lost further ground to 1-month lows on Wednesday and there was sharp selling in Asia as sentiment remained fragile.

Japan’s Nikkei 225 index declined 2.8% with a 1.0% retreat for the Australian ASX index.

China’s Shanghai index declined 0.3% with Hong Kong’s Hang Seng index 0.25% lower in late trading.

Commodities

Oil prices were hampered by weaker risk conditions and a stronger dollar during Tuesday while there was also pressure for a correction.

There were geo-political concerns amid fears over further attacks in the Middle East while OPEC maintained expectations of strong demand in 2022.

Overall sentiment held firm with WTI finding support on dips to around $84.50 p/b before rebounding strongly.

A pipeline explosion which curbed oil supplies from Iraq helped trigger a further advance with WTI posting fresh 7-year highs above $86.50 p/b while Brent also surged to fresh 7-year highs above $88.50 p/b before a limited correction.

Gold was undermined by the combination of a firm dollar and higher bond yields, although there was support above $1,805 per ounce and it recovered to around $1,815.

Silver was able to post strong gains with an element of support from expectations of strong demand and secured a net advance to above $23.50 per ounce.

There was little change on Wednesday with gold just below $1,815 per ounce and silver just above $23.50 per ounce.

Cryptocurrencies

Cryptocurrencies were subjected to choppy trading during Tuesday with an underlying weaker bias.

Crypto assets were undermined by a stronger US dollar and weaker equity markets with a decline in the Nasdaq index also tending to sap support.

Bitcoin dipped to lows below $41,500 before a tentative recovery.

There was a strong rebound late in New York with bitcoin above $42,500, but losses in equites pulled prices lower again in Asia to trade below $42,000.

Ether also retreated to lows below $3,100 and there was selling pressure on rallies with Ether trading close to $3,100 on Wednesday.

Calendar

Major events for the day ahead: (times in GMT)

13.30: Canada consumer prices

14.15: Bank of England Governor Bailey testimony

09.00 (Thurs): Norges Bank rate decision