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Risk Aversion Halts Sterling Gains

Risk Aversion Halts Sterling Gains

GBP

Sterling retreated against the Dollar ahead of Wednesday’s US open as the US currency secured a fresh bout of defensive demand. The Euro was also subjected to renewed selling with Sterling retreating after hitting monthly highs around the 1.1350. 

UK Prime Minister Johnson stated that the country remains in a perilous situation and that schools would not be reopening before March 8th at the earliest. Unease over near-term damage to the UK economy was offset by continued optimism over the vaccine programme and reduced expectations of negative UK interest rates being implemented by the BOE.

Markets will be wary over month-end position adjustment over the next couple of days which could contribute to choppy trading. Risk appetite remained notably fragile this morning which curbed Sterling support as it retreated towards 1.3650 against the Dollar and 1.1285 against the Euro. 

 

USD

The Federal Reserve (Fed) held interest rates in the 0.00-0.25% range, in line with expectations, and there were no changes to the asset-purchase programme with Treasury purchases of at least $80bn per month. The statement was little changed with the committee reiterating that the accommodative policy will continue until inflation runs moderately above 2% for some time in order to reach the average target of 2%. According to the Fed, the on-going public health crisis continues to weigh on activity.

Fed Chair Powell reiterated that monetary policy would continue to provide powerful support and that the economy was a long way from the Fed’s goals. He also repeated that any short-term inflation increase would be transient and that talk of tapering is premature. The dollar resisted losses despite Powell’s dovish rhetoric as risk appetite deteriorated and commodity currencies moved sharply lower.

 

EUR

German consumer confidence declined sharply to -15.6 for January from -7.5 previously and well below consensus forecasts. The Euro was unable to make any headway in early trading yesterday with losses gradually accelerating into the opening of the US session.

ECB council member Klaas Knot stated that the central bank would closely monitor recent Euro strength and determine its impact on inflation. He added that the bank could cut the deposit rate further if that proved necessary to keep the inflation target in sight, fueling speculation of the ECB stepping-up potential protests against further strength in the single currency.  

There were also reports that a number of ECB officials are of the agreement that the markets are underestimating the odds of a possible rate cut. Increased speculation over the last 24 hours that the bank was making a more determined effort to curb further Euro strength amid a covering of long positions. A developing row between the EU and AstraZeneca over the supply of coronavirus vaccines could also cause some downside risk as the single currency retreated to lows near 1.2060.

As of writing, the Euro currently trades just over the 1.21 mark against its US counterpart.

 

Data to watch

08:30 – USD – Advance GDP

08:30 – USD – Advance GDP Price Index

08:30 – USD – Unemployment Claims 

10:00 – USD – CB Leading Index 

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