Risk appetite recovered to some extent on Wednesday, although there was still an important element of caution.

The dollar drifted lower as yields retreated, although moves were limited. EUR/USD advanced to 1.1350 as German benchmark yields broke above 0.0%. Sterling posted limited net gains with EUR/GBP at fresh 23-month lows near 0.8310 before a correction.

The dollar edged lower as yields declined with EUR/USD testing the 1.1350 area.  Relatively narrow ranges prevailed during the US session with the dollar unable to gain significant traction, although commodity currencies weakened as equities moved lower with EUR/USD settling just below 1.1350.

Sterling was unable to make further initial gains following the latest UK inflation data, but the currency held a firm tone, especially with stronger expectations that the Bank of England would sanction a further interest rate increase at the February policy meeting.

The UK currency gained an element of support from a firmer tone surrounding risk appetite even though there was still significant caution.
Although there was a strong focus on political drama surrounding Prime Minister Johnson, the announcement that coronavirus restrictions in England would be eased provided some support for UK markets and UK equities were resilient which maintained expectations of investment inflows.

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