Despite spending most of the morning session lower against the dollar, the US equity open saw a turnaround in market risk sentiment that ultimately resulted in GBPUSD closing the day out 0.22% higher. Over the course of the day, however, the currency pair swung around in a 0.85% range despite little data or GBP specific headlines. This just highlights how fragile current market sentiment is as vaccine headlines reiterate the level of uncertainty that remains in the economic environment at present. The level of economic uncertainty is currently coupled with increased volatility in global equity markets, especially US equity markets, which are currently setting the tone for overall market risk appetite at present. This morning, the pound finds itself a third of a percentage point lower against the dollar as European equities trade in the red upon open, however, as yesterday evidenced, this could turn around throughout the course of the day.
Ever since the comments from ECB policy maker Klaas Knot on the tools the ECB has to prevent further euro strength, the bloc’s currency has been sliding. This morning’s GDP data from France may provide the currency with a more solid footing as the numbers turned out to be less severe than forecasted. France’s GDP slump in Q4 printed at -1.3% QoQ, which left markets more confident around the QoQ figures for Germany and Spain, which experienced looser lockdown measures in Q4 than France did. German and Spanish GDP both were released at 09:00 GMT and indeed printed above expectations, with German SA readings sitting just in positive territory at 0.1% while Spain’s output came in at 0.4%, well above the expected -1.4%. Meanwhile, the EU announced it will tighten rules on the export of Covid shots today, requiring companies shipping vaccines outside the bloc to obtain prior authorization. For the remainder of the day, focus turns to headlines on Italian politics and general developments in risk sentiment.
Yesterday’s trading session was a bit of a wild one for the greenback as equity market dynamics dominated market risk sentiment, and in turn, how the broad dollar traded. Markets began yesterday’s session with a mild risk averse tone, looking towards European equities trading in the red to dictate the mood. This resulted in a mild USD bid, which was reversed once US equity indices started to trade in the green in the latter parts of the day. The risk environment was boosted when US Q4 preliminary GDP figures were released. While the annualized reading undershot expectations by 0.2 percentage points, the 4% reading still showed the US economy grew by 1% QoQ in non-annualized terms. This is a stark contrast to European nations where double dip recessions are expected in Q4/Q1. The reading, therefore, helped the risk environment across markets generally and resulted in the DXY index closing 0.31% lower on the day. Today, PCE inflation data for December is released at 13:30 GMT, with expectations sat at a 1.2% headline reading.
The loonie tumbled to its lowest level vs the greenback in a month as both a decline in crude oil prices and safe haven flows into the dollar sent USDCAD up to the highest since Dec 23. While the turnaround in risk sentiment in the afternoon of yesterday’s session allowed the loonie to retrace some of its losses, USDCAD still closed out the day 0.24% higher on the day. The dynamic in play which caused the tentative risk environment to begin with was concerns about vaccine delays. While the haven bid into the dollar reversed throughout yesterday’s session, this wasn’t shared in other risk barometers like crude oil markets. The market mood overshadowed the positive signal from the largest US stockpile drop in six months as an almost 10 million barrel decline went unnoticed by the Canadian dollar. Outside of IEA data, developments in Canada were isolated to monthly payroll data, which saw a 79.4k drop in November – a further sign that tighter lockdown measures are weighing on Canada’s near-term economic activity.
Source: Monex Europe