Overall volatility levels remained high which dampened conviction as choppy trading continued.

Bond yields edged lower on Tuesday which helped underpin risk appetite. Overall volatility levels remained high which dampened conviction as choppy trading continued.

Wall Street equities posted strong gains, led by the Nasdaq index. Asian markets were mixed with choppy trading in China and little net change.

The dollar retreated from 3-month highs as yield support was eroded, although with buying on dips as uncertainty also prevailed. EUR/USD hit selling above 1.1900 to settle around 1.1875 with slight net gains. Sterling maintained a firm overall tone, but GBP/USD was unable to hold above 1.3900. Commodity currencies posted net gains but retreated from best levels amid further volatility.

The German trade surplus widened to EUR22.2bn for January from EUR16.4bn the previous month with a monthly increase in exports of 1.4% despite a dip in shipments to the UK while imports declined sharply. Overall confidence in the Euro-zone outlook remained fragile.

After securing a limited reprieve in early Europe on Tuesday, the Euro was able to recover further ground as the dollar’s grip on currency markets eased with a retreat from 3-month highs.

The US NFIB small business confidence index edged higher to 95.8 for February from 95.0 previously. There was further evidence of a tighter labour market and there was also upward pressure on prices, maintaining the overall focus on inflation trends.

EUR/USD pushed to highs above 1.1900 against the dollar as commodity currencies also secured a recovery, but the single currency was unable to maintain the more positive tone as underlying sentiment remained cautious amid the underlying shift in yield spreads.

There was an element of caution ahead of Wednesday’s US consumer prices data with headline prices forecast to increase 0.4% on the month to give a 1.7% annual increase with the core rate expected to remain at 1.4% for the month.

The Euro was also hampered by caution ahead of Thursday’s ECB monetary policy meeting with expectations of relatively dovish rhetoric from bank President Lagarde and a particular focus on whether the bank looks to exert control on longer-term yields. Latest data indicated that the bank had increased PEPP bond buying in the latest week.

EUR/USD settled just below 1.1900 and retreated to the 1.1875 area on Wednesday as the US currency secured fresh support. There was further choppy trading surrounding commodity currencies with net losses providing an element of US currency support amid sharp swings in sentiment.

After posting highs near 109.25 on Tuesday, USD/JPY was subjected to a sharp correction in Europe with a dip back below the 109.00 level. US yields moved lower which curbed potential dollar demand and the yen also secured some respite from selling on the main crosses.

Although Wall Street equities posted strong gains, USD/JPY retreated to lows near 108.50 at the European close. There was also a sharp correction higher in the Swiss franc and gold which contributed to the yen correction.

White House Economic Adviser Ramamurti reiterated that the risks of doing too little to stimulate the economy outweigh the risks of doing too much.

Chinese inflation data had little impact and regional markets posted limited gains, although there was further underlying volatility. Overall yields were little changed with USD/JPY advancing to the 108.80 area after finding support below the 108.50 level with EUR/JPY trading around 129.20.

Underlying confidence in the UK economic recovery remained strong on Tuesday which continued to provide underlying Sterling support, especially with the vaccine programme still making strong headway. Monday’s commentary from Bank of England Governor Bailey was also seen as relatively optimistic which helped underpinned sentiment. There were, however, cautious remarks from the England chief medical officer as he warned over major dangers if the re-opening plans were accelerated.

Overall, global influences had a greater short-term impact on the UK currency with a boost from renewed strength in equities and a positive tone surrounding risk appetite. GBP/USD pushed back above 1.3900 before fading again while GBP/EUR rallied to 2-week highs at 1.1694.

Trends in bond yields remained important and risk conditions were slightly less confident on Wednesday as choppy trading continued.

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