Sterling held steady on underlying recovery expectations.

Holidays in some European markets dampened activity during Monday with a lack of front-line US data. US bond yields edged lower as underlying inflation concerns eased slightly. There were significant gains on Wall Street and global bourses also posted a net advance.

The dollar edged lower as real yields remained negative and markets focussed on relatively dovish Fed rhetoric. EUR/USD traded above 1.2200 to 1.2230 as Euro-zone confidence held firm. Sterling held steady on underlying recovery expectations, although dollar weakness was key for GBP/USD edging towards 1.4200.  Commodity currencies posted net gains as the US dollar lost ground.

The Euro dipped lower in the European session on Monday with lack of liquidity contributing to the move. After briefly dipping below 1.2180, EUR/USD recovered ground quickly and pushed back above the 1.2200 level as the dollar failed to gain sustained support.

Fed Governor Brainard stated that the US economy is in the middle of an unprecedented rebound. As far as inflation is concerned she commented that higher prices are linked to a surge in demand with bottlenecks and supply chains also contributing to pressures. She expected that these pressures would subside over time. She also commented that the central bank had the tools to guide inflation lower if price pressures move persistently above goals. The overall rhetoric was very close to remarks from Chair Powell.

St Louis Fed President Bullard stated that we are not quite there to be able to speak about tapering, but it was not the time during the pandemic. Kansas City head George stated that it will take time for the economy to enter the new normal, but that there will be a time when talking about tapering will be important. She also commented that it is hard to distinguish between one-off bottlenecks and a broad lack of capacity while she does not dismiss the risk of higher inflation. The comments could have a slightly hawkish tinge, but there was no hint of a move from the Washington Governors.

The dollar overall was unable to secure sustained support from the comments and EUR/USD settled above 1.2200. Expectations of a dovish short-term Fed policy continued to erode underlying dollar support and EUR/USD traded around 1.2225 in early Europe on Tuesday.

Bank of Japan Governor Kuroda stated that the economy was beginning to see light at the end of the pandemic tunnel. There were, however, market concerns over the situation in Osaka and underlying yen demand remained limited in global currency markets.

The US Chicago Fed National activity index declined to 0.24 for April from 1.71 in March with a notable weakening in the consumption index as retail sales dropped following the surge the previous month.

US equities posted significant gains on the day while bond yields moved lower. The dollar was unable to gain significant support, but the yen also struggled to take advantage and USD/JPY settled around 108.80 at the New York close.

US equity futures edged higher in Asia while the Bank of Japan core inflation reading declined to -0.1% from 0.0% previously. Overall, USD/JPY edged lower to near 108.70 before settling around 108.75 as underlying US sentiment remained weak with EUR/JPY just below the 133.0 level.

GBP/USD briefly dipped lower in Europe on Monday, but there was support above the 1.4100 level with choppy trading as some European markets were closed for a holiday.  Markets remained optimistic over the recovery profile, but there was further uncertainty whether strong demand had been priced in. GBP/EUR dipped towards 1.1580 amid expectations that there was greater upside potential within the Euro-zone.

In testimony to the Treasury Select Committee, Bank of England Governor Bailey reiterated that the bank does not plan to use negative interest rates at this time. He also noted again that recent inflation influences are temporary while expectations are well anchored. He did not expect higher inflation expectations would become entrenched, but also insisted that inflation had to be watched carefully. He also noted that the economic recovery was quite unbalanced while chief economist Haldane noted that upside inflation surprises could require policy action. MPC member Saunders stated that he did not expect a prolonged period of excess demand.

The rhetoric overall was close to expectations and provided a slight element of Sterling support and GBP/USD consolidated just above 1.4150.

EU Commission President von der Leyen stated that there is no alternative to the Irish protocol, but markets are not paying any significant attention at this stage. GBP/USD edged higher to 1.4175 on Tuesday with GBP/EUR around 1.1580 with the latest UK government borrowing requirement slightly below consensus forecasts.

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