Overall risk appetite was little changed on Monday with some reservations over geo-political developments.

Overall risk appetite was little changed on Monday with some reservations over geo-political developments. A small decline in US bond yields providing some relief to risk assets. Wall Street equities posted net gains with the S&P 500 index at a fresh record high amid fund inflow expectations.

The dollar failed to hold its best levels and settled with little net change. European currencies were hampered by trade and vaccine concerns. EUR/USD drifted lower, but did hold above the 1.1900 level. Sterling lost ground as further tensions with the EU dampened confidence. Commodity currencies recovered from Monday’s intra-day lows, but overall posted net

There were further concerns over the Euro-zone coronavirus developments with German healthcare workers calling for tighter restrictions given sustained pressure on intensive care. There were also concerns over increased cases in Italy and France. Germany suspended use of the AstraZeneca vaccine in the country which caused further concerns over the rate of vaccination in the EU with France and Italy also suspending the vaccine, at least temporarily.

The New York Empire manufacturing index strengthened to 17.4 for March from 12.1 previously and above market expectations of 14.5. There was a strong increase in shipments, although the rate of new orders growth slowed slightly. There was also a slight slowdown in employment growth for the month while prices paid increased at a faster rate. Companies were slightly more optimistic over the six-month outlook as expectations of a strong US rebound continued.

The dollar posted net gains early in the New York session with a significant advance against commodity currencies and EUR/USD dipped to lows at 1.1910.

Although US yields edged lower during the day, overall expectations of a very strong economic recovery continued to provide underlying support.

There was an important element of caution and uncertainty ahead of Wednesday’s policy decision with a particular focus on the updated forecasts from the committee members. There was some speculation that the Fed could edge towards a formal move on yield curve control.

The dollar failed to hold its best levels and EUR/USD edged higher to 1.1930 with little net change on the day. Overall Euro-zone confidence remained fragile, especially with further vaccine concerns and widening yield spreads. There was little change in Europe on Tuesday with the dollar posting net gains and EUR/USD at 1.1920.

There was some speculation that the US Congress will push for an early hike in corporate taxes which was an important element in President Biden’s election campaign. Any move to raise taxes would tend to have a negative impact on equities and also limit dollar support given that there would be reduced pressure for the Fed to tighten policy. From a near-term perspective, however, most attention was still focussed on the economic support package and prospect of a big boost to demand.

US yields edged lower during the day with USD/JPY settling just above the 109.00 level as US equities posted limited net gains. Given the importance of yields, conditions were relatively subdued with further caution ahead of the central bank policy meetings this week.

US yields edged lower in Asia on Tuesday which limited potential dollar support, but tight ranges prevailed as the yen also failed to secure buying support. Overall, USD/JPY settled around 109.20 with EUR/JPY holding above the 130.00 level as the Japanese yen remained weak.

Bank of England Governor Bailey stated that there is now a more balanced picture of risks and he now expects that the economy will return to its pre-pandemic size around the end of this year. As far as inflation is concerned, he expects an increase towards 2% in the next few months, but does not expect an increase in inflation to 4-5%. He also stated that the increase in market rates is consistent with the change in economic outlook.

The decision to comment ahead of Thursday’s policy announcement is surprising as the bank should be in a blackout period during this period, but the rhetoric suggests that there will not be significant surprises at the meeting this week with cautious optimism prevailing.

Sterling was undermined to some extent by the EU decision to launch legal action against unilateral changes to the Northern Ireland protocol. In particular, there were concerns that tensions would prevent any easing of wider trade friction over the next few months which would damage the economy.

GBP/USD dipped to lows just above 1.3850 before finding support and edging to near 1.3900. GBP/EUR dipped to lows at 1.1630 before correcting to 1.1652.

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