GBP/USD posted strong gains to 1-month highs just below the 1.4000.

US Treasury yields edged higher on Monday, although overall moves were contained. Risk appetite was slightly more cautious, but liquidity hopes provided underlying backing. Wall Street equities lost ground with mixed global trends as Japanese markets declined sharply.

The dollar dipped sharply to 6-week lows and remained under pressure on Tuesday. EUR/USD broke above 1.2000 and posted 6-week highs near 1.2070 on Tuesday. Sterling posted strong gains as momentum buying kicked in with recovery hopes also important as GBP/USD tested 1.4000. Commodity currencies posted net gains on US dollar weakness and global growth hopes.

The Euro-zone current account surplus declined to EUR25.9bn for February from EUR30.5bn the previous month. For the 12 months to February, the surplus amounted to EUR259bn and 2.3% of GDP, reinforcing that the Euro continues to have strong structural support.

The Euro pushed higher after the European open with a EUR/USD break above the 1.2000 level for the first time in over six weeks triggering stop-loss buying and further gains.

In its monthly report, the Bundesbank stated that the on-going lockdown and VAT increase contributed to weaker private consumption. There was, however, further support in the manufacturing and construction sectors and there will be a further recovery in manufacturing. Higher inflation was expected from the second half of 2021 with the possibility that the rate would increase to above 3% at the end of 2021.

The report did not trigger a shift in the underlying narrative surrounding the German and Euro-zone economy with expectations that the EU would be able to improve the vaccine rate in the second quarter which would help boost the Euro-zone outlook. The EU announced that it had secured a further 100mn does of the Pfizer vaccine.

There were no major US developments with the dollar hampered by expectations that the Federal Reserve would pursue maximum employment.

EUR/USD peaked just below the 1.2050 level as the dollar remained on the defensive. The single currency failed to hold its best levels and weakened amid a sharp retreat against the Pound. The dollar, however, was unable to gain sustained support and EUR/USD settled around 1.2035 after holding above 1.2000.

The dollar remained vulnerable on Tuesday amid fresh demand for commodity currencies and EUR/USD posted fresh 6-week highs around 1.2070 before correcting slightly.

US 10-year yields were little changed ahead of the New York open with the dollar remaining on the defensive. Although yields moved higher after the US open, the dollar was also unable to make headway and USD/JPY retreated to 6-week lows close to the 108.00 level.

There should be no commentary on the economy or monetary officials during the week ahead with the Fed in a blackout period ahead of next week’s policy meeting.

USD/JPY did find support close to 108.00, but failed to secure a significant recovery as yields remained unresponsive.

There were some concerns over geo-political tensions with the US expressing deep concerns over Russian plans to block parts of the Black Sea and also criticised military build-up on the Ukraine border. Chinese President Xi also called for a cold-war mentality to be rejected and criticised coalitions against China’s interests.

Chinese interest rates were unchanged, in line with expectations. There were fresh concerns over Japanese recovery prospects amid the potential for new emergency coronavirus measures. US bond yields edged higher in Asia, but the dollar was unable to make any significant headway and USD/JPY traded around 108.20.

The latest data on the UK indicated that there had been a substantial increase in shopper numbers in the latest week. Although the increase was not a surprise given the re-opening of non-essential retail outlets across much of the UK, expectations of a strong increase in spending provided an element of Sterling support.

Overall risk appetite also held firm which provided an element of initial Sterling support amid expectations of a strong global recovery. The UK currency was also resilient even when there was a retreat in Wall Street equities with some expectations of capital inflows.

Sterling was also boosted by the strong performance posted on Friday which generated momentum buying. GBP/USD posted strong gains to 1-month highs just below the 1.4000 level while EUR/GBP rallied sharply above 1.1600 before consolidating.

The latest UK jobs data recorded a decline in unemployment to 4.9% from 5.0% previously. There was also a smaller than expected increase in jobless claims, although the number of people on payrolls declined for the month. GBP/USD tested the 1.4000 area against the fragile dollar with GBP/EUR just above 1.1600.

Economic Calendar