Sterling continued to lose traction on Monday despite underlying confidence in economic recovery.

There was relief over no sustained contagion impact from the Turkish lira slide. Risk conditions stabilised during the day, although overall confidence was slightly lower, especially over European conditions.

Wall Street equities posted gains amid recovery hopes. The global trend was less convincing and Asian equities retreated on Tuesday.

The dollar gradually lost ground during the day, but edged higher again on Tuesday. EUR/USD posted net gains and held above 1.1900 despite on-going Euro-zone vaccine concerns. Sterling posted net losses with reservations over tensions with the EU.

Commodity currencies surrendered gains as a slide in New Zealand dollar helped drag them lower.

The Euro-zone current account surplus declined to EUR30bn for January from EUR37bn the previous month. For the 12 months to January, the surplus amounted to EUR263bn and 2.3% of GDP. The strong current account position will provide structural Euro support, especially if there is a sustained deterioration in risk conditions.

There was little evidence of contagion from a slide in the Turkish lira which helped limit fears over the impact and also curbed potential Euro selling ahead of the New York open with EUR/USD moving back above the 1.1900 level.

The German Bundesbank stated that the economy was likely to contract sharply for the first quarter of 2021 given that restrictions on activity are tighter than seen in the fourth quarter of 2020. There were also further concerns over near-term coronavirus trends with reports that the German lockdown would be extended until April 18th.

There were, however, reports that the German government was set to increase borrowing by EUR60bn in the supplementary budget. Expectations of a more aggressive fiscal policy provided an element of Euro support.

The Chicago Federal Reserve national activity report dipped to -1.09 for February from a revised 0.75 previously. Existing home sales declined to an annual rate of 6.22mn from a revised 6.66mn the previous month and below consensus forecasts of 6.50mn.

The dollar overall gradually lost traction during the day with EUR/USD recovering towards 1.1950, although the performance for commodity currencies was unconvincing. The New Zealand dollar fell sharply on housing-sector restrictions which dragged commodity currencies lower and EUR/USD edged lower to 1.1925 amid a firm dollar.

There were no significant contagion effects from the Turkish lira slide on Monday which had some impact in limiting defensive yen support. US bond yields were little changed as the 10-year rate failed to break above the 1.70% level while there were strong gains for Wall Street equities.

The dollar overall was unable to make headway and USD/JPY settled around 108.80 amid speculation that speculative yen selling had already reached a peak.

Fed Chair Powell and Treasury Secretary Yellen will testify to Congress on Tuesday and both released prepared text on Monday. Yellen stated that the economy may return to full employment as soon as next year. Powell was less confident on the labour market with comments that the unemployment rate of 6.2% is an underestimate. He also reiterated that the Fed will support the economy for as long as it takes.

The US, Canada and EU imposed sanctions on China over treatment of the Uyghurs in Xinjiang. The overall market reaction was measured with the yuan weakening only slightly, although markets were wary over underlying geo-political tensions. The yen was resilient with the dollar unable to make headway and USD/JPY trading near 108.75.

Sterling continued to lose traction on Monday despite underlying confidence in economic recovery. The on-going row with the EU over vaccines was a significant factor undermining confidence. Prime Minister Johnson stated that he was reassured over EU intentions and that it was vital to avoid vaccine blockades, although he also commented that the third wave in the EU would reach the UK.

Sterling was also hampered by a slightly less confident tone in risk appetite and reservations over the European economic outlook, especially with the UK still facing important tensions with the EU over trade and the Northern Ireland protocol.

GBP/USD dipped to lows around 1.3820 before a recovery to 1.3860 as the US currency faded while GBP/EUR dipped below 1.1600. The UK unemployment rate declined to 5.0% in the three months to July from 5.1%, but there was an increase of 87,000 in the claimant count.

Economic Calendar

07:00GBP Average Earning Including Bonus(JAN)4.90%4.70%
07:00GBP Claimant Count Change(M/M)(FEB)-20.0K
07:00GBP Unemployment Rate(JAN)5.20%5.10%
11:00GBP CBI Industrial Trends Orders (MAR)-35-24
11:00MPC Member Cunliffe Speaks
12:30USD Current Account Balance-189.0B-178.5B
14:00USD New Home Sales(FEB)923B
14:00USD New Home Sales Change(FEB)2.10%4.30%
21:45NZD Trade Balance (M/M)(FEB)-626M
21:45NZD Trade Balance (Y/Y)(FEB)2750M

*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.