GBP/USD lost ground in early Europe and retreated to 2-week lows.

Global bond markets were relatively stable on Tuesday as dovish Fed comments offered reassurance and curbed selling in Treasuries. Wall Street equities retreated after sharp gains the previous day amid valuation reservations. Overall risk appetite was steady with Asian equities posting notable gains in late trading.

The dollar posted early gains on Tuesday, but then weakened sharply amid weaker as reflation trades gained fresh support. EUR/USD found support just below 1.2000 and posted net gains to near 1.2100. GBP/USD rallied firmly from lows near 1.3850, and edged towards 1.4000 despite pre-budget uncertainty.

Commodity currencies reversed early losses to post significant gains as the US dollar faded.

German retail sales data was much weaker than expected with a 4.5% slide for January to give an annual decline of 8.7%, reinforcing concerns over near-term spending trends. The latest unemployment data was also weaker than consensus forecasts with an increase of 9,000 for February following a 37,000 decline the previous month. Germany did announce a very limited easing of coronavirus restrictions from next week. The headline Euro-zone inflation rate was unchanged at 0.9% for the February and in line with expectations. The core rate declined to 1.1% from 1.4% and below consensus forecasts of 1.4% with little net impact.

EUR/USD dipped to below the 1.2000 level, but there was support below this level and the break was recovered quickly with the Euro recovering ground.

The dollar overall continued to lose ground in early New York with significant gains in commodity currencies. There was also evidence of strong dollar selling into the London fix and EUR/USD moved above 1.2050 as the dollar lost ground on the major crosses.

Fed Governor Brainard stated that the central bank would remain patient on monetary policy and was focussed on realised progress towards inflation and employment goals. She reiterated that monetary accommodation should not be removed when unemployment declines to near estimates of a neutral rate and she would be concerned if there was a disorderly increase in bond yields. There was no overt move to push back against higher yields and the dollar attempted to stabilise.

San Francisco Fed President Daly stated that any inflation spike will be short lived with a full job-market recovery to take at least a year or two after the US is fully vaccinated. Dovish Fed rhetoric undermined the US currency with EUR/USD peaking around 1.2090 and the dollar was unable to recover ground on Wednesday as reflation trades dominated.

USD/JPY was unable to make a challenge on the 107.00 level in early Europe on Tuesday and gradually lost ground amid wider losses.

The US New York PMI index retreated to 35.5 for February from 51.2 the previous month. There was, however, an increase in the IBD consumer confidence index to 55.4 from 51.9 previously, maintaining expectations of firmer consumer spending. US bond yields overall were also marginally lower on the day which sapped dollar support as markets continued to monitor risk trends.  The yen, however, was unable to secure sustained support, especially with a renewed move back into reflation trades. In this environment, USD/JPY settled around 106.70 as the Japanese currency lost ground on the crosses.

China’s Caixin PMI services index edged lower to 51.5 from 52.0 previously and in line with consensus forecasts, although overall business confidence held firm. Wall Street futures posted net gains in the Asian session which curbed potential yen demand and USD/JPY edged higher to the 106.85 area with EUR/JPY above 129.0.

Latest data indicated that German exports to the UK declined 30% in January compared with January 2020 with a notable impact from Brexit. It will take many months for distortions surrounding trade data to unwind. The Nationwide reported a faster rate of growth in UK house prices, but there was little market reaction.

GBP/USD lost ground in early Europe and retreated to 2-week lows, but there was support above 1.3850 and the pair gradually recovered ground as the US currency lost traction with overall Sterling sentiment holding firm.

The UK currency was underpinned by a more stable tone surrounding risk appetite and demand for reflation trades. There was, however, an underlying lack of momentum amid speculation that pressure to boost Sterling weightings had been completed. There was also an element of caution ahead of Wednesday’s UK budget.

As the dollar lost ground, GBP/USD pushed to highs around 1.3975 at the European close while GBP/EUR eventually settled unchanged just below 1.1550. Overnight reports indicated that the furlough scheme would be extended further than expected until the end of September which had some impact in dampening confidence in the potential UK recovery.

Economic Calendar

Expected Previous
07:30 CHF CPI (M/M)(FEB) 0.10%
07:30 CHF CPI (Y/Y)(FEB) -0.60% -0.50%
08:45 Markit/ADACI Svcs PMI(FEB) 44.7
08:50 Markit Serv PMI(FEB) 47.3
08:55 EUR German PMI Composite(FEB)
08:55 EUR German PMI Services(FEB) 46.8 46.8
09:00 GDP Prelim YY -4.70% -6.60%
09:00 GDP Prelim QQ 16.10% -2.00%
09:00 Euro-Zone PMI Composite(FEB) 47.5 47.5
09:00 Euro-Zone PMI Services(FEB) 45 45
09:30 GBP PMI Services(FEB) 38.8 38.8
10:00 Euro-Zone PPI (M/M)(JAN) 0.80%
10:00 Euro-Zone PPI (Y/Y)(JAN) -1.20% -1.10%
12:00 USD MBA Mortgage Applications -11.40%
13:30 CAD Building Permits (M/M)(JAN) -5.00% -4.10%
14:45 USD Markit PMI Composite(FEB 01) 58
14:45 USD Markit Services PMI(FEB) 57.5
15:00 USD ISM Non-Manufacturing PMI(FEB) 56.8 58.7
15:30 USD Crude Oil Inventories -5.190M 1.285M
16:00 BoE MPC Member Silvana Tenreyro Speech
18:00 Fed President Evans Speaks
20:15 RBNZ's Governor Orr speaks

*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.