Sterling recovered some ground amid optimism over recovery trends but failed to hold best levels.

Narrow ranges prevailed on Monday ahead of the latest US inflation data. US yields moved higher which dampened overall risk conditions to some extent. Wall Street equities edged lower with a strong economic recovery priced in.

The dollar edged higher under the influence of higher bond yields. EUR/USD edged below 1.1900 with tight ranges prevailing. Sterling recovered some ground amid optimism over recovery trends but failed to hold best levels. Commodity currencies were unable to make headway given higher yields.

The Euro-zone retail sales increased 3.0% for February, above expectations of a 1.5% increase with an annual decline of 2.9% from 5.2% previously.

The Euro held a firm tone ahead of the New York open, although there was EUR/USD resistance close to 1.1920 as narrow ranges prevailed amid a lack of direction. German Chancellor Merkel stated that infection rates are too highs and that the third wave may be the toughest. There were reports that the lockdown restrictions were due to be extended for a further three weeks and Merkel warned that measures would need to be tightened.

The dollar was unable to gain significant backing on positioning grounds given that short positions have been cut for 12 weeks in succession.

There was an increase in ECB PEPP bond purchases for the latest week, although the figure is still running below the bank’s target of EUR80bn per month.

There was an element of caution ahead of the Tuesday US CPI release given the potential impact on US Treasuries, Federal Reserve policy expectations and currency markets. Consensus forecasts are for a 0.5% increase in prices for the month with a jump in the year-on-year rate to 2.5% from 1.7%. Core prices are expected to increase 0.2% to give an annual increase of 1.5% from 1.3% previously.

Stronger than expected readings would trigger expectations that the Federal Reserve would be forced into an earlier than expected tapering of bond purchases.

Boston Fed President Rosengren stated on Monday that an interest rate hike is still at least two years away and a weak release would undermine the dollar.

The dollar posted net gains on Tuesday as yields increased with commodity currencies also losing ground and EUR/USD moved back below the 1.1900 level.

Chinese new loans increased CNY2730bn for March from CNY1360bn the previous month and above consensus forecasts of CNY2450bn. M2 money supply growth slowed to 12.6% from 12.9% previously. The data offered some reassurance over underlying credit trends.

The dollar continued to drift lower into the New York open, but yields moved higher in early US trading with USD/JPY edging back towards 109.50. Overall risk conditions were slightly more cautious which continued to provide an element of yen support. Reports indicated that Treasury Secretary Yellen will not name China as a currency manipulator which protected risk appetite. For the first quarter of 2021, China reported an annual increase in exports of 38.7% with increase in imports of 19.3%.

Bank of Japan governor Kuroda stated that the loose monetary policy will continue for a long time and that a weaker yen will provide support to the economy.

US yields moved higher to near 1.70% which underpinned the US dollar and there was a net USD/JPY advance to 109.70.

Sterling continued to post gains in early Europe on Monday with support deriving from the ability to hold important support levels against the dollar and Euro. From lows at 1.3670, GBP/USD recovered to above 1.3750 while GBP/EUR rallied to above 1.1570 from near 1.1500.

There were also hopes that the partial re-opening of the economy would help underpin the recovery and support Sterling sentiment.

Prime Minister Johnson stated that there were still significant differences with the EU over the Northern Ireland protocol. Overall confidence in the UK currency remained fragile amid expectations that a recovery had been priced in.

There were no comments on monetary policy from Bank of England member Tenreyro and Sterling retreated from its best levels as GBP/USD failed to hold above 1.3750.

There was an element of on-going support from the UK vaccination programme with all over 50s and vulnerable groups offered a vaccination. UK GDP increased 0.4% for February, slightly below consensus forecasts, although there was a stronger than expected recovery for industrial production. There was only a limited recovery in trade volumes for the month. The data failed to generate any Sterling traction as GBP/USD traded just below 1.3750 with GBP/EUR around 1.1550.

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