Major Currencies Trade With Pro-Risk Bias

Uneven and rather unpredictable trading conditions have prevailed for a second successive session on Tuesday. Ahead of the US close, the S&P 500 is still trading in the red territory but has recovered sharply off earlier session lows, giving a sense of De-Ja Vu after yesterday’s ferocious late-session recovery.

The net result for G10 forex markets, which have been sensitive to equity market fluctuations is a slightly pro-risk bias. The Dollar Index (DXY) is trading marginally higher on the day but has pulled back from earlier highs 96.20s to underneath the big figure.

The US dollar shrugged off mixed Consumer Confidence data, the headline index for which saw a slight fall owing to inflation and pandemic and Omicron-related concerns but not as much as expected, and slightly stronger than expected house price growth in November.

The main talking point in markets is still the US rate decision, due on Wednesday, in addition to geopolitics, with both having been cited as reasons for risk asset underperformance and heightened safe-haven demand.

But one day ahead of what is expected to be a very hawkish sounding Fed meeting (they are expected to give the green light to multiple hikes and QT in 2022), most risk-sensitive G10 currencies did well.

The Australian and Canadian dollars, both gained around 0.3% on the day versus the US dollar, taking the second and third from the top spot in terms of on-the-day G10 performance, lagging on the high beta NOK, which gained 0.5%. The Australian currency, which jumped back above 0.7150/$, was supported by hawkish RBA bets in wake of a hotter than expected Q4 2021 Consumer Price Inflation report that will have come as a big surprise to the central bank.

The Canadian dollar is also being supported by hawkish central bank bets, with a minority of analysts calling for the BoC to surprise the consensus with a 25bps rate hike on Wednesday. More likely, the bank will tweak its forward guidance on rate hikes to reflect the recent run of strong economic data to signal a rate hike is coming in March.

The British pound was another risk-sensitive G10 currency to perform well on Tuesday, with GBP/USD pair recovering back above the 1.3500 level as Forex markets continue to ignore an uncertain UK political backdrop. With the London police now investigating claims of parties in Downing Street that broke lockdown rules, Boris Johnson’s position as PM looks tenuous, though strategists expect that any potential replacement will be a “safe pair of hands”.

As for the rest of the G10 currencies; JPY and NZD were both flat on the day versus the US dollar, with USD/JPY just under 114.00 and NZD/USD just under 0.6700 ahead of December New Zealand trade figures.

Despite decent German data out during the European morning, the Euro dropped 0.2% versus the US dollar, with EUR/USD suffering from technical selling amid the break below a key long-term uptrend in play since late November. The pair currently trades on the 1.1300 handle having recovered from earlier lows in the 1.1260s, its lowest level in more than a month.

Finally, CHF was the standout G10 underperformer on the day, with EUR/CHF rallying 0.4% to the 1.0375 area and USD/CHF rallying 0.6% to hit 0.9200 for the first time in nearly two weeks as some speculated about SNB intervention.