Caution prevailed ahead of Wednesday’s Federal Reserve policy meeting.

Caution prevailed ahead of Wednesday’s Federal Reserve policy meeting. US retail sales data was weaker than expected, but recovery expectations limited the impact. Wall Street markets were little changed and narrow ranges prevailed in Asia with reservations over trends in China.

The dollar posted net gains on expectations of higher bond yields and a strong US recovery. European currencies were unsettled by doubts over the AstraZeneca vaccine.

EUR/USD dipped below 1.1900 before trading just above this level on Wednesday. Sterling recovered from sharp initial losses with GBP/USD close to 1.3900.

The Canadian dollar posted fresh 3-year highs with USD/CAD below 1.3450. Commodity currencies overall were little changed with limited net losses.

The German ZEW economic sentiment index strengthened to 76.6 for March from 71.2 previously and above consensus forecasts of 71.2. The current conditions component also improved to -61.0 from -67.2 and slightly above expectations of -62.0. The Euro-zone expectations index also strengthened to 74.0 from 69.6.

ECB council member Elderson stated that inflation would move higher in the short term, but the central bank would look through it and the Euro remained fragile.

US retail sales declined 3.0% for February and notably weaker than consensus forecasts of a 0.5% decline, although the January increase was revised higher to 7.6% from the original figure of 5.3%. Underlying sales declined 2.7% on the month after an 8.3% gain the previous month while there was a 3.5% decline in the control group following an 8.7% increase for January.

The dollar dipped marginally in an immediate reaction to the data, but quickly recovered ground and posted net gains. The upward revisions negated the headline data and there were strong expectations of a short-term boost to demand.

Industrial production declined 2.2% for February compared with consensus forecasts of a 0.3% gain and despite a surge in utilities output while manufacturing output declined 3.1%. The NAHB housing index declined slightly to 82 for March from 84 previously.

Overall, the dollar posted net gains and EUR/USD dipped to lows just below 1.1885 before a tentative recovery to just above 1.1900.

There was further caution ahead of Wednesday’s Federal Reserve policy meeting, especially with this seen as a key meeting for the Fed in terms of developments in the bond market which will also have a crucial impact on the dollar. Tight ranges prevailed on Wednesday with a firm dollar tone and EUR/USD fractionally above 1.1900.

Despite choppy trading, US yields were little changed following the US retail sales data. Equities were held in tight ranges, but there was significant yen buying during the day with gains for the Swiss franc also having an important impact in underpinning the Japanese currency. USD/JPY dipped to test support below the 109.00 level.

Senate Minority leader McConnell stated that the Republicans would not support tax increases for infrastructure spending, but with solid US support on dips.

There were further reports that the Japanese state of emergency would be lifted on March 21st. The latest monthly Tankan business confidence index recorded an increase to 6 for the manufacturing sector from 3 previously while the services sector improved to -5 from -7 and companies expect further improvements in the short term with optimism over demand conditions in China. Overall risk conditions were slightly less confident, although equities were little changed.

US Secretary of State Blinken stated that China is acting more aggressively and repressively with unease over US-China relations having some impact in dampening risk conditions. US bond yields edged higher with USD/JPY around 109.15 as caution prevailed ahead of the Fed policy meeting.

Sterling retreated sharply in early Europe on Tuesday with some evidence of fundamental concerns surrounding trade and the AstraZeneca vaccine. GBP/USD declined to lows just above the 1.3800 level while GBP/EUR strengthened to highs at 1.1680. The UK currency was also hampered by position adjustment ahead of Thursday’s Bank of England policy decision, although markets expect that the bank will maintain cautious optimism over the outlook.

There was also increased speculation that the UK vaccine optimism had been priced in to the Sterling valuation to an important extent.

There was, however, buying on dips, especially with a lack of confidence in the Euro-zone outlook. There was also relief after the European Medicines Agency stated that the vaccine benefits outweigh any risks, although a full report is due on Thursday and some uncertainty continued.

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