Safe-haven flows dominate markets mid-week

Here’s what you need to know on Wednesday, January 19:

Major Wall Street indices suffered heavy losses and the yield on 10-year US Treasury bonds climbed to its highest level in more than two years near 1.9% on Tuesday, allowing the greenback to continue to outperform its main rivals. Safe-haven flows continued to dominate financial markets early Wednesday amid escalating Russian-Ukrainian tensions, inflation fears and rising coronavirus cases in Asia. Later in the day, building permits and housing starts will feature in the US economic record and Statistics Canada will release December’s Consumer Price Index (CPI) data.

The US dollar index, which tracks the performance of the dollar against a basket of six major currencies, appears to have entered a consolidation phase above 95.50 after rising 0.5% on Tuesday.

EUR/USD fell sharply on Tuesday and has already erased all of the gains it had recorded over the past week. The pair continues to hold above 1.1300 so far, but the risk-averse market environment could make it difficult for the common currency to find demand. Data released by Destatis showed on Wednesday that the annual HICP was up 5.7% in December, in line with the flash estimate and market expectations.

GBP/USD is trading near 1.3600 after Tuesday’s sharp decline as UK inflation figures appear to help the pound remain resilient against its rivals. The UK’s Office for National Statistics reported that the consumer price index rose from 5.1% in November to 5.4% on an annual basis in December. This reading exceeded market expectations by 5.2%.

USD/JPY rose above 115.00 on the back of rising US Treasury yields, but reversed direction in the second half of the day as the yen attracted investors as a safe haven. The Bank of Japan noted in its quarterly outlook report that the pass-through of rising commodity costs to consumers has not spread to a wide range of items.

Gold closed in negative territory on Tuesday but the key support zone that lies near $1,800 remains intact. Further losses could be seen if another higher leg in yields causes the yellow metal to fall below this level.

Despite the general strength of the dollar, USD/CAD continues to fluctuate around 1.2500 as surging crude oil prices support the loonie. Annual CPI in Canada is expected to edge up to 4.8% in December from 4.7% in November. A stronger than expected inflation reading could give the CAD an additional boost in the second half of the day and vice versa.

AUD/USD fell below 0.7200 and appears to be struggling to stage a convincing rebound. The Australian Bureau of Statistics will release data on consumer expectations and the January unemployment rate in the early trading hours of the Asian session on Thursday.

Bitcoin continues to decline slightly towards the critical $40,000 mark after closing flat on Tuesday. Ethereum is down for the third day in a row on Wednesday and is looking to test $3,000.

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