Overall volatility remained subdued ahead of policy decisions by the ECB and Federal Reserve.

Global markets were held in relatively tight ranges during Wednesday. Risk appetite gradually improved amid expectations of strong liquidity with lower US yields also soothing sentiment. Wall Street equities led a global rebound which eased concerns to some extent. There were still reservations over global coronavirus trends.

The dollar failed to hold a tentative recovery as yields declined. EUR/USD found support close to the 1.2000 level and settled little changed. Sterling consolidated with no further challenge on 1.4000 for GBP/USD. The Canadian dollar strengthened sharply after the Bank of Canada signalled a rate hike earlier than 2023. Commodity currencies overall posted net gains, but faded slightly from best levels.

The French government announced that it expects domestic travel restrictions will be lifted on May 3rd. There was an element of optimism that the Euro-zone performance would improve strongly during the second quarter of 2021 as vaccination rates increase. There were, however, still concerns over the near-term outlook, especially with infections still running at very high levels. The Euro tended to drift lower ahead of the New York open as risk conditions remained fragile. The dollar secured an element of defensive support and EUR/USD dipped to test the 1.2000 area.

Equity markets recovered ground following the Wall Street open which limited the potential for a further dollar recovery. Commodity currencies posted significant gains and EUR/USD recovered to the 1.2035 area at the European close as underlying dollar sentiment remained fragile.

Overall volatility remained subdued, especially ahead of policy decisions by the ECB and Federal Reserve over the next week. Markets expect a low-key ECB meeting on Thursday, but rhetoric from President Lagarde will be watched closely.

Following a more hawkish stance from the Bank of Canada, there was some speculation that the Federal Reserve could move more quickly to slow the rate of bond purchases, especially with expectations of very strong growth. US yields failed to respond with the dollar unable to make headway. Global coronavirus concerns continued to have some impact in stifling risk appetite with India recording over 300,000 new daily infections and EUR/USD settled around 1.2030 on Thursday.

USD/JPY found support below 108.00 on Wednesday, but was unable to make significant headway during the day, especially with only a slight recovery in bond yields. The yen was also resilient even when equities moved higher in US trading and USD/JPY held just above 108.00 at the European close.

Wall Street equities maintained a firm tone later in the New York session, but the dollar was unable to make any headway.

There was a lack of commitment in Treasury markets ahead of next week’s Federal Reserve policy decision, but buyers tended to remain in control.

Consensus forecasts for US GDP growth have been revised higher with expectations of a figure above 6.0% this year. US bond yields, however, edged lower in Asia on Thursday with the 10-year yield below 1.55% and the 5-year rate near 0.78%. The decline in yields was again a key factor undermining support for the US dollar with a fresh USD/JPY retreat below the 108.00 level in Asia on Thursday while EUR/JPY traded just below the 130.0 level.

The slightly lower than expected inflation curbed potential Sterling support in early Europe on Wednesday. Although the headline rate is set to move sharply higher in the short term, there were expectations that underlying inflation would remain under control and curb any pressure on the Bank of England to tighten policy.

Sterling drifted lower into the New York open amid less confident risk conditions and GBP/USD dipped below the 1.3900 level.

Risk appetite strengthened after the Wall Street open which curbed potential selling pressure on the UK currency, especially with commodity currencies posting gains.

As equity markets moved higher, the UK currency was able to gain some support on optimism over global reflation trades.

There was also some encouraging evidence that vaccines were having an important impact in curbing serious illness, although there were also warnings that infections would increase over the summer. Markets will continue to monitor anecdotal evidence of economic recovery with key business confidence data due on Friday.

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