Sterling was boosted by global recovery hopes and domestic recovery hopes with GBP/USD posting 34-month highs.

Confidence in the global economic recovery has remained strong amid reflation expectations.

Bond yields continued to move higher which had a significant impact on asset classes.  Wall Street equities overall nudged lower as higher yields dampened support. Liquidity hopes continued to underpin global equity markets, but pressure for a correction gathered pace, especially with higher yields.

The dollar remained on the defensive amid expectations of low US real yields, although with a recovery from worst levels. EUR/USD peaked near 1.2150, but momentum stalled on Monday. Sterling was boosted by global recovery hopes and domestic recovery hopes with GBP/USD posting 34-month highs at 1.4050 before a correction.

Commodity currencies also corrected after strong gains with AUD/USD failing to hold 35-month highs above 0.7800.

The German manufacturing PMI index strengthened to a 36-month high of 60.6 for February from 57.1 previously and well above consensus forecasts. There was, however, a further downturn in the services sector and there was a similar pattern for the Euro-zone as a whole as the manufacturing index edged higher to 54.9 from 54.1 while the services sector declined slightly to 44.7 from 45.4. The data overall provided a Euro lift as EUR/USD moved above 1.2100 with highs at 1.2145.

The US PMI manufacturing index edged lower to 58.5 for February from 59.2 previously and in line with market expectations. The services index strengthened to 58.9 from 58.3, the highest reading for close to 6 years and above expectations. The dollar attempted to recover after the data, but struggled to make significant headway.

The Federal Reserve released its semi-annual monetary report ahead of Chair Powell’s testimony to Congress this week. There was no indication in the text that Powell will deviate from his dovish stance, especially with comments that inflation expectations were little changed. New York Fed President Williams stated that the economy is still in a deep hole and the increase in yields is not a concern. He was also not concerned that the proposed fiscal stimulus will be too large.

EUR/USD settled above 1.2100 at the European close. Commodity prices posted fresh gains on Monday which continued to erode potential US dollar support as the Australian dollar, for example, at 35-month highs against the US currency. The Euro was unable to extend gains, but sentiment held firm as EUR/USD traded around 1.2110.

Underlying yen demand remained weak on Friday as markets continued to back reflation trades. USD/JPY found support around 105.25 and recovered to 105.65 as EUR/JPY moved back above the 128.00 level as US yields held firm.

Richmond Fed President Barkin stated that inflation is not in the numbers, although market moves were dominated by reflation trades which limited yen demand.

CFTC data indicated a slight increase in long yen positions in the latest week, maintaining the potential for position adjustment.

China made no changes to interest rates at the latest policy meeting, in line with market expectations, with the 1-year rate held at 3.85%. Markets also continued to monitor US-China relations with China requesting that unreasonable tariffs on Chinese exports are removed.

US yields continued to move higher with the 10-year rate just above 1.38% which underpinned the dollar against the Japanese yen, although Wall Street equities edged lower during the Asian session. USD/JPY posted slight net gains to the 105.70 area with EUR/JPY just above 128.0.

The UK PMI manufacturing index strengthened to a 2-month high of 54.9 for February from 54.1 the previous month while the services sector index advanced to a 4-month high of 49.7 from 39.5 with both figures above consensus forecasts. There were, however, important stresses within the manufacturing sector as delivery times continued to lengthen amid serious supply-side constraints due to trade difficulties with the EU.

The UK CBI industrial trends index recovered to -24 for February from -38 previously and above expectations of -35. There was, however, a further deterioration in exports for the month as underlying confidence remained weak.

Bank of England external monetary policy committee member Vlieghe stated that there would be no need for further monetary stimulus if the economy evolved in line with the February projections. He added, however, that risks are still skewed towards a weaker scenario and that negative interest rates could be needed later this year or into next year. There was no negative Sterling impact and GBP/USD broke above the 1.4000 level for the first time since April 2018.

CFTC data reported a marginal increase in long Sterling positions in the latest week to 11-month highs of 22,000 from 21,000 previously.

Optimism over an economic re-opening and firm global risk appetite continued to underpin the pound, although it retreated from fresh 34-month highs at 1.4050 to trade just below 1.4000.

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