Overall risk appetite was slightly more cautious as near-term coronavirus fears offset longer-term optimism.

The dollar maintained a firm tone on Monday as US yields increased, although it faded from best levels as medium-term sentiment remained weak. Overall risk appetite was slightly more cautious as near-term coronavirus fears offset longer-term optimism. Selling pressure in equities was still limited amid expectations of a strong global recovery later in 2021.

EUR/USD found support below 1.2150 and settled above this level on Tuesday as the dollar faded. Sterling posted limited net gains with EUR/GBP below 0.9000 despite near-term coronavirus concerns with expectations of medium-term recovery and vaccine hopes. Commodity currencies recovered sharply from intra-day lows as the dollar faded.

The Euro-zone Sentix investor confidence index strengthened to 1.3 for January from -2.7 the previous month and slightly above consensus forecasts as overall volatility in the index moderated. There was no significant impact from the data with primary attention focussed on the dollar, although there were some near-term reservations over near-term European coronavirus developments which will undermine activity in the services sector.

The dollar continued to gain some relief as US yields moved higher and the Euro continued to lose ground after EUR/USD dipped back below the 1.2200 level earlier in the European session. There was also some evidence that short dollar positions were being closed amid the recent rally.

The US employment index was marginally lower at 99.0 for December from a revised 99.1 the previous month. Data releases are unlikely to have a significant impact in the short term before the retail sales release on Friday. EUR/USD retreated to lows just below 1.2135 before regaining some ground as the US currency failed to hold its best levels as the US currency was subjected to mixed pressures.

Atlanta Fed President Bostic stated that the central bank is not locked into a paradigm and changes are possible while he played down any concerns over higher bond yields. Dallas head Kaplan expressed hopes that substantial progress would be made later this year which would allow a tapering of bond purchases.

Speculation over a less dovish Fed stance helped underpin the US currency, although underlying dollar sentiment remained fragile which limited the scope for gains and commodity currencies also recovered later in the day. The dollar resisted sharp losses and EUR/USD traded just above 1.2150 at Tuesday’s European open.

The US bond yields continued to edge higher into the New York open which helped underpin the US dollar and USD/JPY held above the 104.00 level.

The House of Representatives introduced articles of impeachment against President Trump, although there was little market reaction given that there was unlikely to be an impact on policy. US equities overall posted limited net losses on the day amid pressure for a correction.

USD/JPY continued to edge higher to 104.40 before fading into the European close to around 104.10.

According to sources, President-elect Biden will announce the cost of his proposed fiscal support package on Thursday and fiscal developments will continue to have an important impact on market sentiment. US equity futures were dampened on Tuesday by reports that China was planning a further crackdown on Hong Kong and USD/JPY was held around 104.20 at the European open with markets also monitoring coronavirus developments in Japan.

Sterling continued to lose ground in early Europe on Monday and GBP/USD retreated to fresh 2021 lows near 1.3450 as US yields moved higher.

UK Chief medical adviser Whitty stated that the next few weeks would be the worst so far in terms of the number of people being hospitalised. Chancellor Sunak also commented that the economy would get worse before it gets better. Overall Sterling sentiment remained fragile, especially given further near-term contraction in activity, although there was also an element of optimism over the medium-term vaccine prospects and potential for a robust recovery later in 2021.

Bank of England MPC member Tenreyro stated that the work on the feasibility of negative interest rates was still going on. She stated that there was no evidence that negative rates undermine bank profits, although the current UK banking structure could lead to a less favourable outcome. She also commented that further stimulus might be needed. There was further speculation that there could be a move to negative rates.

Sterling gradually regained ground into the European close with a GBP/USD move back above the 1.3500 level while GBP/EUR rallied to test the 1.1100 area. The UK currency held firm on Tuesday with some support on valuation grounds and vaccine hopes.

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