The dollar posted notable gains to near 4-month highs on expectations of US out-performance.

Risk appetite was less confident amid reservations over global coronavirus developments and underlying supply-chain difficulties.  Wall Street equities lost ground amid speculation over tax increases. Global equity bourses were also more vulnerable amid the defensive tone.

The dollar posted notable gains to near 4-month highs on expectations of US out-performance and a more defensive risk tone. The Euro remained under pressure as EUR/USD dipped to 4-month lows below 1.1850. GBP/USD dipped to 6-week lows below 1.3700 with Sterling unable to gain any traction, especially with weaker risk conditions.

Commodity currencies continued to lose ground amid a firm dollar and weaker equities. Oil prices declined sharply amid weaker risk conditions, but recovered from worst levels.

The EU health director stated that he was optimistic that the EU would hit a 70% vaccination target by late summer, but concerns continued and the Euro retreated.

The US current account deficit widened to $188.5bn for the fourth quarter of 2020 from $180.9bn the previous quarter and close to consensus forecasts.

The Richmond Fed manufacturing index strengthened to 17 for March from 14 previously with a further increase in delivery times. There was a further solid increase in employment for the month and further upward pressure on prices with prices paid increasing at close to the fastest rate on record. The Philly Fed non-manufacturing index jumped to 38.6 for March from 3.9 previously. Price increases were more moderate than in the manufacturing sector.

Dallas Fed President Kaplan stated that his base case is that there will be a temporary surge in prices this year while inflation will settle down next year. He also stated that his forecasts have increased meaningfully. He is on the hawkish end of the committee spectrum and expects the Fed to start increasing interest rates in 2022.

Fed Chair Powell reiterated that monetary policy would remain highly accommodative. He remained confident that there would not be a sustained increase in inflation, but also insisted that the central bank had the tools to deal with inflation if it is a concern. Governor Brainard reiterated that she expected a transitory increase in inflation.

The dollar maintained a firm overall tone and EUR/USD retreated steadily to test important support near 1.1850. The US currency held a strong tone on Wednesday, close to 4-month highs, amid the less confidence risk tone. EUR/USD traded just below the 1.1850 level as confidence in the Euro-zone outlook remained fragile.

There has been on-going speculation surrounding US fiscal policy amid debate surrounding further stimulus measures and tax increases. There were further reports that the Administration’s infrastructure stimulus package will be $3-4trn which underpinned confidence in near-term fiscal spending. Treasury Secretary Yellen, however, stated that future tax increases will be needed to pay for infrastructure projects and public investment.

Overall risk conditions were also less buoyant during the day amid concerns over the global coronavirus impact. There were also further concerns over difficulties in global supply chains, especially surrounding chips which will disrupt short-term production schedules.

Bond yields were contained in narrow ranges, although USD/JPY recovered from lows below 108.50 to trade around 108.70.

Japan’s PMI manufacturing index increased to 52.0 for March from 51.4 the previous month while the services sector remain in contraction at 46.5 from 46.3 previously.

Overall risk appetite remained more fragile during Wednesday’s Asian session and the yen maintained a firm tone with USD/JPY just above the 108.50 level.

There was little sustained impact from the UK labour-market data. The CBI industrial orders index recovered strongly to -5 for March from -24 the previous month and above consensus forecasts of -20 and the strongest reading since April 2019. There was also a recovery in export orders, although they were still slightly below the long-term average. Manufacturers also expect output to increase at the fastest pace since August 2017 while prices are also expected to increase at a faster pace. There were still difficulties surrounding supply chains.

With further reservations surrounding the UK/EU vaccine developments, GBP/USD initially dipped to near 1.3750 and posted losses on the main crosses.

Risk conditions remained more fragile on Wednesday which limited UK currency support. The annual inflation rate declined to 0.4% for February from 0.7% and well below expectations of 0.8% with core inflation rate at 0.9% from 1.4%. The lower than expected inflation rate will dampen any expectations of higher yields and curb currency support. GBP/USD remained near 6-week lows just above 1.3700 with GBP/EUR dipping below 1.1600 as the UK currency remained on the defensive.

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