Overall risk appetite remained strong on Tuesday which continued to provide Sterling support with GBP/USD at fresh 34-month highs near 1.3950.

Trading activity on Monday was dampened by the US market holiday. Overall risk appetite held notably firm with confidence in a global economic recovery and strong liquidity provisions by central banks. European equities posted solid gains with the advance led by the FTSE 100 index. Asian markets posted gains as US futures secured a solid advance.

The dollar remained on the defensive amid expectations of capital flows into risk assets and close to 2-week lows. EUR/USD was held below 1.2150 while the yen weakened on the crosses. Sterling held a strong tone amid strong risk appetite and vaccine optimism with GBP/USD posting 34-month highs.

Euro-zone industrial production declined 1.6% for December, a steeper decline than the 1.0% expected, with a year-on-year decline at -0.8% from -0.6% previously. The trade surplus widened to EUR29.2bn from EUR25.7bn previously, reinforcing structural Euro support.

The impact from data was limited with markets monitoring forward-looking evidence in the services sector, especially with further reservations over the near-term impact of coronavirus restrictions. Evidence of a decline in German infection rates provided an element of relief.

The dollar overall remained on the defensive with an on-going flow of funds into risk assets which undermined demand in the US currency as commodity currencies posted further gains. The Euro overall was unable to make headway during the day and EUR/USD was capped below 1.2150, although overall sentiment remained firm amid wider US losses as risk conditions dominated.

Overall trading volumes were limited given the US market holiday. Markets were waiting for the US retail sales data on Wednesday amid the on-going debate of US trends after notably weak US data for the December data. There will also be a further debate whether a strong US recovery is likely to strengthen or weaken the US currency. Risk appetite remained robust on Tuesday which continued to provide net support for risk currencies and the dollar remained under pressure. Overall, EUR/USD stabilised below the 1.2150 level as the single currency was unable to make significant headway on the crosses.

US bond yields moved higher during the day which helped underpin the US dollar while the strength in global risk appetite curbed potential demand for the Japanese yen. The dollar posted slight net gains for the day despite wider losses and USD/JPY traded around 105.40 at the European close.

Overall risk appetite remained strong on Tuesday with further gains for equities and a sharp advance for Japan’s Nikkei index. The Chinese yuan continued to gain support and the dollar dipped to 31-month lows close to 6.40 in the offshore market.

There were some reservations over US-China tensions amid reports that China would look to block rare-earth exports to the US, although there was no significant impact on markets as US equity futures continued to push higher.

There were further pledges of strong Japanese monetary and fiscal support which kept the yen on the defensive and there was also speculation over a further covering of long yen positions. USD/JPY edged to 1-week highs just above 105.50 while EUR/JPY strengthened to near 128.0.

There was further optimism surrounding UK coronavirus developments with the new of new UK infections declining to below 10,000 for the first time since early October. Although there is usually a dip on Mondays the data reinforced expectations of a further underlying easing of infection rates.

The UK vaccination also continued to boost optimism over an early easing of lockdown restrictions even though Prime Minister Johnson continued to preach caution. In this context, there were expectations that the UK would recover earlier than the Euro-zone and narrow the 2020 under-performance gap.

The strength in global risk appetite also continued to provide underlying support during the day with strong gains for the FTSE 100 index boosting expectations that the UK market was securing strong capital inflows from international investors amid a re-rating of the UK economy.

GBP/USD was able to consolidate just above 1.3900 against the dollar while GBP/EUR strengthened to around 1.1470. Overall risk appetite remained strong on Tuesday which continued to provide Sterling support with GBP/USD at fresh 34-month highs near 1.3950 before a slight correction with GBP/EUR rallying to fresh 8-month highs near 1.471. Global risk conditions will remain important in the short term.

Economic Calendar

10:00German ZEW Survey (Economic Sentiment)(M/M)(FEB)6061.8
10:00German ZEW Survey (Current Situation) (FEB)-68.5-66.4
10:00Euro-Zone GDP (Q/Q)-0.70%
10:00EUR Euro-Zone ZEW Survey (Economic Sentiment)(FEB)58.3
10:00Euro-Zone GDP (Y/Y)-5.10%-5.10%
13:15CAD Housing Starts(JAN)228.3K
13:30NY Empire State Manufacturing Index(FEB)63.5
13:30CAD Foreign Securities Purchase(DEC, 2020)11.78B
20:00FOMC Member Mary Daly Speech
21:00USD TIC Net Long-Term(DEC, 2020)149.2B
23:50JPY Exports (Y/Y)(JAN)2.42
23:50JPY Merchandise Trade Balance Total(JAN)749.6B

*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.