Things can only get better
From the European market open Sterling ceded ground against the US Dollar, reaching a 2021 low near 1.3450 as US bond yields increased. Chancellor Rishi Sunak stated that the economy would get worse before it gets better and Chris Whitty, UK Chief medical adviser, also stated that the next few weeks would be the worst so far for numbers of hospitalisations. Given that, the Pound sentiment remained fragile but with hints of optimism over vaccine impact for the medium-term and potential for an economic recovery later in the year.
Silvana Tenreyro, Bank of England Monetary Policy member, stated that the bank continues to explore the feasibility of negative interest rates and that there added that further stimulus might be needed if enacted as the current UK banking structure could lead to a less favourable outcome, leading to further speculation that the bank could move to negative rates.
As the European market closed Sterling slowly moved back above the 1.3500 mark and the Euro retreated to the 1.1111 area. Sterling opens this morning near 1.3550 on the Dollar with the Euro near 1.1150.
The Dollar continued to gain some relief as US yields moved higher.. There was also some evidence that short dollar positions were being closed amid the recent rally.
The US employment index was marginally lower at 99.0 for December from a revised 99.1 the previous month. Data releases are unlikely to have a significant impact in the short term before the retail sales release on Friday. The Euro retreated to lows just below 1.2135 before regaining some ground as the US currency failed to hold its best levels as the US currency was subjected to mixed pressures.
Atlanta Federal Reserve (Fed) President Bostic stated that the central bank is not locked into a paradigm and changes are possible while he played down any concerns over higher bond yields. Dallas head Kaplan expressed hopes that substantial progress would be made later this year which would allow a tapering of bond purchases.
Speculation over a less dovish Fed stance helped underpin the US currency, although underlying dollar sentiment remained fragile which limited the scope for gains and commodity currencies also recovered later in the day. The dollar resisted sharp losses and the Euro traded just above 1.2150 at Tuesday’s European open.
The Euro-zone Sentix investor confidence index strengthened to 1.3 for January from -2.7 the previous month and slightly above consensus forecasts as overall volatility in the index moderated.
With no significant data impacting the market from a Euro perspective, primary attention shifts towards the dollar. Although there were some near-term reservations over European coronavirus developments which could undermine activity in the services sector.
As of writing, the Euro is currently trading around the 1.2155 mark against its US counterpart.
Data to watch
11:00 – GBP – MPC Member Broadbent Speaks