Bank of England Governor Bailey stated that the UK was facing a very large shock to income.

On Monday, the Bank of Japan announced that it would continue unlimited bond-buying operations for a further three days which helped trigger further yen selling. The dollar jumped to fresh 6-year highs just above the 125.0 level before a very sharp correction as the yen was heavily oversold after the run of sharp losses.

Former key Japanese Finance Ministry official Sakakibara (nicknamed Mr Yen) stated that there was no need for the Bank of Japan to intervene at current prices but should take action if the yen weakens beyond 130.0 against the dollar.

There was further very volatile trading in the yen during Tuesday’s Asian session as the Bank of Japan continued its efforts to cap yields through open-market operations with USD/JPY settling around 123.50.

The Japanese fiscal year-end on March 31st and wider month-end position adjustment in global markets will contribute to further volatility in currency markets over the next few days.

The main impact is again likely to be on the yen with potential capital repatriation which will provide and element of support the Japanese currency.

There will also be choppy trading on position adjustment across all major currencies, especially given high volatility across asset classes during March.

The Dallas Fed manufacturing index retreated to 8.7 for March from 14.0 previously while inflation pressures remained very strong and there were stronger upward pressure on wages, maintaining underlying concerns over the inflation outlook.

Despite inflation fears, there was an easing of immediate upward pressure on US bond yields with the 10-year yield just below 2.50% which limited the scope for further dollar buying.

Oil prices came under pressure on Monday with a sharp decline in global benchmarks amid unease over underlying demand trends. Brent declined close to 8.0% during the day as volatility increased.

A sustained decline in oil prices would help ease inflation fears to some extent and also help cap upward pressure on bond yields.

There have been no major military developments in Ukraine with further evidence that Russian forces are looking to concentrate on the South and East with Ukraine forces regaining some territory in the north.

Talks between Russian and Ukraine officials are due in Turkey on Tuesday with Ukraine aiming for a ceasefire.

Expectations of progress are very low at this stage and the alleged poisoning of Abramovich has tended to over-shadow the talks.

Bank of England Governor Bailey stated that the UK was facing a very large shock to income and spending while the shock from energy prices this year is likely to be larger than any single year in the 1970s. He added that the bank is beginning to see evidence of a slowdown in the economy while there is a very large trade-off between inflation and output.

According to Bailey, there are risks in both directions to the outlook and trade-off situations are very difficult to deal with. Bailey also stated that the bank had been very cautious over forward guidance given the very high degree of uncertainty and in reference to the May rate decision is concerned, he noted that the situation is very volatile. He did add that it is appropriate to tighten policy, but the overall rhetoric continued to cast doubt whether the bank would pursue an aggressive run of interest rate hikes.

Underlying confidence in the Euro-zone outlook remained fragile. There was, however, an increase in Euro yields as global inflation pressures dominated. A slide in oil prices also helped cushion the Euro during the day. US yields dipped lower in US trading which limited the scope for dollar gains.

EUR/USD consolidated just below 1.1000 in early Europe on Tuesday. USD/JPY retreated sharply from highs in very choppy trading and traded close to 123.50 on Tuesday

Sterling drifted lower with no support from Bank of England Bailey’s comments. GBP/USD dipped below to 10-day lows around 1.3070 and traded just below 1.3100 on Tuesday. GBP/EUR dipped towards 1.1900.

The Swiss franc recovered from sharp losses as it was correlated with yen moves. EUR/CHF hit 1.03 before a retreat to 1.0250 with USD/CHF edging lower to 0.9330.

Commodity currencies corrected lower as prices weakened, but with buying on dips. Australian retail sales data was stronger than expected. AUD/USD dipped below 0.7500 and traded around 0.7495. USD/CAD strengthened to highs above 1.2590 before a retreat to 1.2510 on Tuesday.

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