Sterling recovered from intra-day losses with GBP/USD posting 33-month highs.

Wall Street equities posted fresh gains to record highs, although there was mixed trading in Asia on Tuesday. Risk appetite held firm amid global recovery hopes with market moves dominated by strong liquidity provisions by central banks.

The dollar failed to hold a tentative gain and retreated later in the day with sharper losses on Tuesday amid negative US real yields. EUR/USD moved higher and regained 1.2050 to trade around 1.2080. Sterling recovered from intra-day losses with GBP/USD posting 33-month highs.

Commodity currencies rallied to post significant net gains as the US dollar faded.

The Euro-zone Sentix investor confidence index edged lower to -0.2 for February from 1.3 the previous month and below consensus forecasts of 1.9. There were still concerns over the near-term Euro-zone economic outlook, but the decline in German coronavirus cases offered some hope. Although Chancellor Merkel stated that another two weeks of falling numbers would be needed to justify an easing of restrictions, the potential for a second quarter recovery limited the potential for Euro selling.

ECB President Lagarde again called on an aggressive fiscal stimulus while underlying price pressures are likely to remain subdued.

The US employment trends index strengthened to 99.3 for January from 98.6 the previous month which had little underlying impact. There are no significant US data releases on Tuesday, although there is likely to be some speculation over Wednesday’s CPI release given the increase in inflation commentary over the past few days.

The New York Federal Reserve survey indicated that household spending growth expectations were the highest in five years which suggested that there was considerable pent-up demand which could trigger a sharp increase in spending, especially with a substantial fiscal boost and the Euro held steady.

EUR/USD retreated to lows at 1.2020 as the US currency gained ground, but there was fresh dollar selling in New York. Commodity currencies posted net gains and EUR/USD strengthened to highs around 1.2065 before fading to 1.2050. The dollar was subjected to renewed selling on Tuesday and commodity currencies also extended gains with EUR/USD around 1.2080 amid expectations that negative real yields would undermine the US currency.

Markets continued to monitor any rhetoric over the US dollar policy under new Treasury Secretary Yellen amid speculation that there would be an underlying preference for a weaker US currency to help underpin the economy. Trends in the bond market were also important for currency market direction and US yields edged lower during the day which limited support for the US currency. There was USD/JPY retreat to lows below 105.20 at the European close amid wider US currency losses.

Cleveland Fed President Mester stated that the economy is in a slow recovery, but vaccinations could lead to a strong increase in activity. The House of Representatives debated threshold limits for individual payments within the fiscal stimulus with markets expecting s strong fiscal package.

The Chinese central bank stated that it was committed to continue with interest rate reform with a prudent stance and no sudden shifts which had some positive impact on risk conditions. There was an important element of uncertainty surrounding position adjustment into the new-year Chinese market holidays starting on Thursday.

Wider dollar losses dominated in Asia on Tuesday with a USD/JPY dip below the 105.00 level as the yen also resisted selling pressure on the crosses.

There were no significant UK data releases during the day and Sterling was unable to secure a breakout during the day. Overall risk appetite held firm during the day which provided underlying UK currency support and there was also an element of support from higher oil prices. GBP/USD failed to make a challenge on the 1.3750 area early in Europe and a correction was amplified by a generally stronger US currency.

There was a GBP/USD dip to below 1.3700 while GBP/EUR dipped to 1.1400, although UK selling pressure was contained amid expectations of a less dovish central bank stance.

There were renewed Sterling gains later in the European session with a fresh GBP/USD move to 1.3750 while GBP/EUR retreated to 1.1400 There was an element of caution ahead of the GDP data on Friday. Before then, Bank of England Governor Bailey is due to deliver the Mansion House speech on Wednesday with markets watching whether there would be any move to inject a more dovish scenario surrounding the outlook.

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