Dollar on the back foot

The euro and sterling advanced against the dollar yesterday, following the Japanese yen higher with the latter gaining more than 1% against the US currency buoyed by speculation about interest rate hikes by the Bank of Japan. The euro rose to over $1.05 for a time but has slipped to around $1.0480 this morning, still well off Wednesday’s low of $1.04, while sterling has strengthened to $1.2660, up about a cent from Wednesday’s low and a new 2025 to date high to boot. EURGBP has been confined to a very narrow range for much of this week and is trading at £0.8280 this morning. For the day ahead, the focus will be on flash PMIs for February in the main economies, with the readings for Germany and France released a short while ago something of a mixed bag (stronger than expected for the former, weaker than expected for the latter).

It was relatively quiet in bond markets yesterday with yields generally marginally lower on day. In equity markets, the S&P 500 retreated from Wednesday’s record high, shedding almost 0.5%, while European stocks ended flat.

Retails sales in the UK rebounded strongly in January according to data released earlier this morning, increasing by 1.7% following a decline of 0.6% in December. Over the three months to January sales volumes were still down 0.6% from the three months to October, though they were ahead by almost 1.5% on the same period a year earlier.

Fed member Musalem says interest rates should remain “modestly restrictive” until inflation converges further towards its 2% target, at which point they can be “gradually reduced” to a more neutral level.

For the day ahead, as well as the flash PMIs, other data due include consumer confidence and existing home sales in the US. Meanwhile, Germany goes to the polls over the weekend, which could have some bearing on markets at the start of next week.