Sterling was hit by profit taking and weaker risk conditions, but rallied from intra-day lows.

Global bond markets and the inflation discussion have remained a key focus across asset classes. Overall risk appetite was more fragile on Friday with selling in equities amid doubts whether very loose monetary policies were sustainable.

Wall Street equities dipped late in Friday’s session before a significant recovery on Monday. After losses on Friday, global equity markets also recovered in Asian trading.

The dollar recovered some ground on Friday amid the dip in defensive demand, but lost ground on Monday amid gains in equities. EUR/USD dipped below 1.2100 and held below this level on Monday. Sterling was hit by profit taking and weaker risk conditions, but rallied from intra-day lows amid underlying optimism with GBP/USD just below 1.4000.

Commodity currencies slumped on Friday before paring losses on Monday with risk conditions dominant.

There was dovish rhetoric from ECB officials during Friday which undermined the Euro. Council member Schnabel stated that the central bank may need to add support if the rise in yields hurts growth. Fellow member Stournaras commented that the central bank should accelerate the rate of PEPP bond purchases. Visco stated that extreme prudence must be used before exiting support measures, although he also acknowledged that inflation expectations were on the rise.

The Euro overall weakened into the New York open, especially with fragile risk conditions and EUR/USD dipped towards the 1.2100 area against the dollar.

US personal income increased sharply by 10.0% for January as the stimulus measures and increase in benefits boosted incomes. Spending increased 2.4% for the month following a 0.4% decline the previous month and in line with market expectations.

The core PCE prices index increased 0.3% for January for the second successive month with the year-on-year rate edging higher to 1.5% from 1.4%.

The Chicago PMI index retreated to 59.5 for February from 63.8 previously and slightly below forecasts of 61.0. There was a significant slowdown in new orders growth to the weakest level since August 2020 with some supply constraints in evidence.

EUR/USD rallied after the Wall Street open before fading again to trade near 1.2075 as a sharp dip in risk appetite boosted the US dollar and triggered a slide in commodity currencies. There was only a marginal decline in long Euro positions for the latest week, maintaining the risk of position adjustment, but risk appetite recovered in Asia on Monday which curbed near-term dollar demand and EUR/USD recovered slightly to the 1.2085 area amid a bounce in commodity currencies.

US bond yields retreated slightly on Friday, although there was still solid support for the US currency as changes in bond yields continued to have an important impact. There was also yen selling into the London fix amid position adjustment with USD/JPY highs near 106.70 before a correction to 106.55 as Wall Street indices dipped again.

Over the weekend, the House of Representatives passed the $1.9trn fiscal stimulus Bill with the legislation now passing to the Senate with a recovery in risk appetite.

China’s PMI manufacturing index edged lower to 50.6 for February from 51.3 and below consensus forecasts while the non-manufacturing index retreated to 51.4 from 52.4. Employment and exports orders were both in contraction territory. The Caixin PMI index also edged lower to 50.9 from 51.5 previously.

Wall Street futures recovered on Monday which underpinned risk conditions and USD/JPY touched 6-month high at 106.70 before fading slightly to trade around 106.55 against the yen as bond yields edges lower with markets still wary over a fresh retreat in equity markets amid higher volatility

Bank of England chief economist Haldane stated that there is a risk that central bank complacency could allow the inflation cat out of the bag and that there might be a more sustained rise in inflation than expected. There were, however, also deflationary forces and his main point was that the cost of getting judgements wrong could be significant. Deputy Governor Ramsden stated that rising yields reflect good news on the economy and that market moves are reflation moves rather than inflation moves. He added that there will be a high bar to unwinding UK monetary easing.Sterling was undermined by more fragile risk conditions with GBP/USD dipping below 1.2900 before a recovery. GBP/EUR weakened to 1.1530 before a retreat to 1.1560 with Sterling still securing underlying support amid optimism over the vaccine programme.

CFTC data recorded an increase in long, non-commercial Sterling positions to 31,000 contracts in the latest week from 22,000 previously and the highest figure for close to 12 months. This extent of long positioning has often been followed by a sharp decline in the spot rate which will make traders nervous.

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