Sterling posted significant gains amid domestic vaccine optimism with GBP/USD at 34-month highs around 1.3900.

Overall risk conditions have strengthened amid expectations of global economic recovery. Wall Street equities posted fresh record highs on Friday as expectations of strong fiscal and monetary policy provided support. US futures posted gains on Monday with Japan’s Nikkei 225 index at fresh 30-year highs.

The dollar was unable to sustain gains and dipped lower into Friday’s London fix as risk appetite also held firm. EUR/USD traded above 1.2100 amid the weaker US currency. Sterling posted significant gains amid domestic vaccine optimism with GBP/USD at 34-month highs around 1.3900.

Commodity currencies posted a net advance as the US dollar lost ground.

The Euro was unable to make headway ahead of Friday’s New York open and continued to drift lower. The US currency also gained traction against most major currencies, especially commodity currencies, and EUR/USD retreated to lows near 1.2080 before stabilisation.

The University of Michigan consumer confidence index declined to 1 6-month low of 76.2 for the preliminary February reading from 79.0 the previous month and below consensus forecasts of 80.8. There was a slight decline in the current conditions index and a sharper downturn in the expectations component while the one-year inflation expectations index increased to 3.3% from 3.0% previously. There were still some near-term reservations over trends in retail sales.

The dollar was unable to make further gains and retreated towards the European close with some evidence of significant selling into the London fix. EUR/USD moved back above the 1.2100 level and settled around 1.2120 at the New York close.

CFTC data recorded a small net increase in long Euro positions to 140,000 contracts for the latest week from 137,000 previously, maintaining the potential for dollar short covering of the US currency can secure fresh support on fundamentals grounds.

Over the weekend, former ECB President Draghi was installed as Italian Prime Minister which helped underpin confidence. The dollar overall remained on the defensive on Monday amid negative real yields and expectations of global recovery. Commodity currencies posted gains and EUR/USD edged higher to the 1.2140 area.

The dollar pushed significantly higher into Friday’s New York open with a USD/JPY peak near 105.20. Although it initially held firm, there was an erosion of yen support in New York amid wider losses. The Japanese yen was hampered by an increase in US bond yields with the 10-year yield increasing to near 1.2% and the Euro also posted a net advance against the Japanese currency.

CFTC data recorded a decline in long yen positions to 35,000 in the latest week from 45,000 previously, lessening the threat of further dollar short covering.

Japanese GDP recorded an increase of 3.0% for the fourth quarter of 2020, above consensus forecasts of 2.4% and the previous data was revised up slightly.

Overall risk conditions held firm on Monday which dampened demand for the Japanese currency as it lost ground on the crosses. Chinese markets remained closed, but the offshore yuan rate made further gains. USD/JPY overall edged above the 105.00 level despite losses elsewhere with EUR/JPY just above 127.50.

Sterling drifted lower in early Europe on Friday as the raft of data releases failed to provide support. Although the GDP data beat expectations the magnitude of the 2020 decline focussed attention on the long recovery path. There were also further concerns surrounding the underlying budget situation with Chancellor Sunak under pressure to maintain strong support. GBP/USD dipped to lows near 1.3775 against a firmer dollar, although overall selling was limited.

The NIESR estimated that the economy contracted 5.3% for January following the official 1.2% increase for December which would give a year-on-year decline of 11.5%. No change is expected for February before a significant rebound in March as restrictions start to ease which would give a first-quarter contraction of 3.8%.

CFTC data recorded an increase in long Sterling positions to 21,000 contracts in the latest week from 10,000 previously and the largest long Sterling position for 11 months which indicates that hedge fund buying has been stepped up.

Sterling was boosted by optimism that coronavirus restrictions would be eased with strength in global risk conditions also a positive factor with markets looking through near-term weakness. GBP/USD strengthened to 34-month highs near 1.3900 with GBP/EUR rallying to 9-month highs near 1.1435.

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