The dollar was resilient against European currencies as higher yields provided underlying support with the dollar index at 3-week highs.

Global bond markets were more stable and risk appetite held steady during Monday. Wall Street equities posted strong gains and European bourses also made firm headway. There was a more defensive tone in Asia on Tuesday as China warned over the risk of overseas bubbles in stock markets.

The dollar was resilient against European currencies as higher yields provided underlying support with the dollar index at 3-week highs.  EUR/USD retreated steadily with lows around 1.2020. Sterling overall edged lower despite strength in equities with some evidence that underlying momentum was fading.

Commodity currencies posted net gains, but faded from best levels as the US dollar advanced.

The final Euro-zone PMI manufacturing index was revised slightly to 57.9 from the flash reading of 57.7 which provided an element of Euro support.

German consumer prices increased 0.7% for February with the year-on-year rate at 1.3% from 1.0% and above expectations of 1.2%. The data maintained reservations over the potential for increased inflation pressures within Germany and the Euro-zone.

There were, however, further dovish comments from the ECB with council member Villeroy stating that much of the recent increase in bond yields is unwarranted and that the ECB must react against it. The remarks sparked speculation over dovish rhetoric and possible further action at next week’s policy meeting.

There was a significant decline in Italian yields following the comments and the Euro also lost ground with EUR/USD retreating to below 1.2050.

There was a marginal revision for the US PMI index to 58.6 from the flash reading of 58.5.  The ISM manufacturing index strengthened to 60.8 for February from 58.7 previously and comfortably above market expectations of 58.8. There was stronger growth in new orders and production growth while employment increased at a faster pace.

There was a further increase in the prices index to 86.0 from 86.1 previously and the highest reading since May 2008 which will maintain underlying concerns over increased inflation pressures. The data overall provided support for the US currency amid expectations of US out-performance.

The Euro attempted to regain some ground later in the session, but the dollar overall was able to resist selling pressure and EUR/USD settled below 1.2050. Higher bond yields continued to underpin the US dollar on Tuesday as it traded at 3-week highs with EUR/USD around 1.2020 as commodity currencies drifted lower.

Source reports suggested that the Bank of Japan is prepared to resist domestic bond yields increasing too far ahead of the bank’s next scheduled review. Expectations of domestic yield control maintained a lack of yen demand and the overall yield structure underpinned the US currency.

Wall Street futures posted sharp gains and USD/JPY posted further gains to 6-month highs near 106.90 at the European close.

Richmond Fed Barkin commented that higher bond yields were a reflection of hopes for a recovery and vaccine optimism with Treasuries dipping lower following the comments. San Francisco head Daly was more dovish with comments that the central bank must ensure that no one is left behind in the recovery.  Nevertheless, there were expectations that the Federal Reserve would tolerate higher yields which continued to underpin the US dollar.

US equity futures edged lower on Tuesday which curbed the potential for fresh dollar buying and USD/JPY settled around 106.85.

The UK PMI manufacturing index was revised higher to 55.1 from the flash reading of 54.9. Mortgage approvals declined to 99,000 for January from a revised 102,800 the previous month, although this was above consensus forecasts of 96,000.

Overall mortgage lending remained strong on the month, but there was a further net repayment of consumer credit and overall consumer lending declined to £2.8bn from £4.5bn the previous month. There was an annual decline in consumer credit of 8.9% and a fresh record low for the series. Spending will be weak in the short term, although there could be a release of savings later in the year.

Bank of England Deputy Governor Ramsden stated that the bank wants to have the tool of negative interest rates in case recovery forecasts don’t materialise.

Sterling gained an element of protection from a recovery in equity markets and overall optimism surrounding the UK vaccine programme was sustained.

GBP/USD was, however, capped below 1.4000 and retreated to lows near 1.3900 while GBP/EUR settled around 1.1550. There was some evidence that Sterling buying was fading and GBP/USD dipped to 1.3880 on Tuesday with GBP/EUR holding above 1.1550.

Economic Calendar

07:00EUR German Retail Sales (Y/Y)(JAN)1.30%2.80%
07:00EUR German Retail Sales (M/M)(JAN)-0.30%-9.10%
07:00GBP Nationwide House Prices (Y/Y)(FEB)5.60%6.40%
07:00GBP Nationwide House Prices (M/M)(FEB)-0.30%-0.20%
08:55German Unemployment Rate(M/M)(FEB)6.10%6.00%
08:55German Unemployment Change(M/M)(FEB)6K-41K
10:00Euro-Zone CPI (Y/Y)(FEB)0.50%-0.30%
13:30CAD GDP (M/M)(JAN)0.40%0.70%
13:30CAD GDP (Y/Y)-5.16%
13:30CAD GDP Annualized (Q/Q)47.60%40.50%
18:00FOMC Brainard Speaks
19:00FOMC Member Mary Daly Speech
21:30AiG Construction Index(JAN)57.6
21:45NZD Building Permits (M/M)(JAN)4.90%

*All rates shown are indicative of interbank rates and should only be used for indication purposes only. It is important to note that foreign exchange rates fluctuate and that rates may vary depending on the amount and the base currency that is purchased or sold. Rates are correct as of 8:00am UK time. CentralFX are not responsible for the rates shown.