BoE’s Bailey remains on inflation watch.

The German IFO business confidence index strengthened to 93.3 for March from 91.1 previously and significantly above consensus forecasts of 91.0. The current conditions component strengthened to 95.4 from 93.9 and the expectations index also recovered to 91.2 from 88.4.

The IFO stated that conditions had improved considerably, especially in key areas such as manufacturing.

The latest data recorded a sharp increase in Swiss sight deposits to CHF567bn from CHF515bn the previous week. This was close to the largest weekly increase on record and suggested that Credit Suisse and UBS had drawn on a liquidity facility at the National Bank.

Markets remained uneasy over underlying trends, but overall risk appetite improved with a reduction in immediate fears surrounding the US and European banking sectors.

Equities posted net gains and, although there was still a cautious tone, risk-sensitive asset tended to strengthen with notable gains for oil.

The improvement in risk conditions triggered a sell-off in Treasuries. The 2-year yield increased to 4.00% with the 10-year yield above 3.50%.

The improvement in risk appetite curbed potential dollar demand and the US currency was unable to take advantage of higher yields with a net decline against majors and the dollar index lost ground.

Bank of England Governor Bailey stated that further tightening would be required if persistent inflation appears. He added that monetary policy must act to ensure that inflation from abroad does not become long lasting. He also noted that the full effect of higher interest rates are still working through the economy.

The Euro dipped steadily as financial sector concerns increased again. The dollar gained an element of support on defensive grounds. The Euro edged higher during Monday as risk appetite improved and defensive dollar support faded. Overall ranges were narrow with EUR/USD peaking below 1.0800 in Europe. EUR/USD traded above 1.0800 on Tuesday as the US currency drifted lower.

Higher US yields undermined the yen, especially with stronger equities. USD/JPY hit highs around 131.75 before fading. The yen posted significant gains on Tuesday amid evidence of Japanese capital repatriation and USD/JPY dipped sharply to near 130.50 before recovering.

The Swiss franc posted gains despite firmer risk conditions. EUR/CHF edged lower to 0.9880 with USD/CHF retreating to 0.9165.

Sterling held firm amid stronger risk conditions and a net re-rating of the UK outlook. GBP/USD advanced to just above 1.2300 while EUR/GBP retreated to 0.8780.

The Australian dollar struggled to make headway despite firmer equities with AUD/USD held below 0.6650. There were net AUD/USD gains to near 0.6700 on Tuesday. USD/CAD initially drifted lower towards 1.3700 and dipped sharply to 1.3635 on Tuesday as oil prices posted net gains.

Economic Calendar

09:45BOE Gov Bailey Speaks
15:00CB Consumer Confidence101.0102.9

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