USD

The greenback traded largely mixed on Wednesday, but did not manage to make gains against major currencies as the latest U.S inflation data showed headline CPI increased by 1.4% year-over-year last month, slightly cooler than consensus. The $1.9-trillion Covid-19 relief plan and the vaccines are still driving positive risk sentiment. Regarding the Federal Reserve, Chair Jerome Powell reassured markets that FOMC policy will stay uber-accommodative and look through transient rises in inflation. This likely stands to keep the reflation trade alive and USD under pressure. Elsewhere, Joe Biden had his first conversation as president with Chinese leader Xi Jinping, speaking of his concern about China’s unfair economic practices as well as human rights abuses. Today, the weekly US jobless claims report is due.

EUR

The EUR/USD pair traded flat on Wednesday, as traders were assessing the German inflation and French industrial production figures. In general, Core inflation in Germany rocketed in January, but it is expected to ease a bit over the next few months while Manufacturing output in France rose in Q4, but slowed in December. European Central Bank President Lagarde made any relevant remarks. Looking ahead, Angela Merkel revealed plans to gradually open up the euro area's largest economy, despite the chancellor's concerns over a renewed spike in Covid-19 infections. Meanwhile, the European Union rebuffed the U.K.’s call to reset the two sides’ relationship, saying Britain needs to honor the promises it made on Northern Ireland as part of the Brexit deal. On that note, sour developments can have a greater impact on the EUR and GBP. 

GBP

The Pound edged up 0.10% against the greenback for the fifth straight trading session on Wednesday, touching its strongest level in three years. Surprisingly, Bank of England Governor Bailey’s Mansion House speech did not refer to monetary policy, helping the GBP to keep firm. The GBP’s performance can be attributed to a confluence of better-than-feared GDP and labor market data, the smooth signing of a Brexit deal and relatively modest disruption caused by the new rules, and the U.K.'s success in rolling out Covid-19 vaccines quickly to its population. As a result, the British Pound has been the second-strongest performing G10 currency this year. Given today’s light calendar, traders will likely continue to closely track developments surrounding the pandemic, as well as keeping an eye on the progress of additional U.S fiscal stimulus.

JPY

The Japanese yen was able to hold gains from the day before and closed flat against the U.S dollar on Wednesday amid a light trading session. Price pressures remain under the radar, as recent consumer and producer price indices have been well below market expectations and way far from Japan’s Central Bank (BoJ) 2% target. Nonetheless, as the pandemic adds fears of deflation, the BoJ is facing changes in its board that could tip the balance in favor of aggressive monetary easing and test the limits of its already stretched policy tool-kit. Today, markets in Japan are closed for holidays.

CAD

The Loonie was almost unchanged (-0.06%) against the greenback on Wednesday, holding near its strongest level in two weeks as crude oil extended its winning streak and the U.S dollar broadly declined. The Bank of Canada (BoC) Deputy Governor Timothy Lane’s speech yesterday did not have an impact on the CAD, however, it was interesting to see what is the BoC’s view about cryptocurrency. Lane called the recent spike in cryptocurrency prices “speculative mania,” and said such assets don’t have the qualities to become the money of the future. Furthermore, he said costly verification methods and unstable purchasing power makes cryptocurrencies like Bitcoin a “flawed” method of payment. Looking ahead, in the absence of material data, the USD/CAD will continue to be driven by the oil market and the U.S headlines. 

MXN

The Mexican peso rose more than 0.2% against the U.S dollar on Wednesday as the greenback remains under pressure due to the risk-on sentiment. However, Wednesday’s trading session was marked by an increase in volatility in the USD/MXN pair ahead of Mexico’s Central Bank (Banxico) interest rate decision. Market consensus is for Banxico to cut rates by 25bp, but there remains a potential for a hawkish hold. Even if Banxico does lower its policy interest rate to 4.00% from the current 4.25% level, less-dovish forward guidance, perhaps following higher-than-expected inflation data, could see the Mexican Peso strengthen.

CNY

Yesterday, the Chinese yuan did not manage to hold previous gains and slid almost 0.4% against the greenback ahead of the holiday. The CNY’s drop is likely owing to disappointing inflation data, which signaled that China’s economic recovery is progressing well, but it has not been accompanied by price pressures. January core inflation slipped below zero (-0.3%) for the first time since 2010, dragged down by weak household demand for services. It is worth noting, the soft inflation readings are unlikely to impact PBOC policy but underscore why fears of an imminent tightening are exaggerated. Liquidity conditions will be impacted as Chinese markets are shut for the week-long Chinese New Year holiday.

BRL

The downbeat economic figures released yesterday soured the market sentiment and led the BRL to fall 0.2% against the greenback. Official data showed that Brazil’s retail sales volumes plunged 6.1% month-to-month in December, well below the consensus, -0.8%. The poor performance in the retail sector reflects the phasing-out of fiscal aid, the worsening of the pandemic, and rising inflation. Furthermore, the December numbers signal that the Brazilian economy is not out of difficulties, and is depending on fiscal and monetary support. Expectations around a new round of emergency aid remain in the spotlight as this measure could overstretch fiscal spending in the country and push up risk premiums on Brazil's debt and currency.