Daily brief

Calmer markets ease sterling lower

Sterling

With certain comments released over the weekend (no changes in income tax limits and possible hikes in capital gains tax) this suggests that the UK Government may be balancing up the good news of the vaccination effort with tougher fiscal conditions. Sterling may struggle with a narrative of increased austerity from Wednesdays budget, should that be the medicine that the Chancellor believes we should all be taking alongside our Covid-19 jabs.


We expect more leaks in the coming 48hrs but for now, the Budget does not seem to be offering sterling much assistance.


Euro

It was only a matter of time; if we’re talking about rising bond yields in the US and elsewhere in the world, the ECB is going to start getting scared of its own shadow. Comments on Friday from European Central Bank members that they may need to add support to the Eurozone economy should the rise in yields hurt the recovery, has helped risk but hurt the Euro and will continue to do so as long as the ECB is seen as a soft touch.

PMI's today won’t have been affected by last weeks bond movement but could add to the narrative of weakness that has affected the single currency for weeks now.


US dollar

Wider markets stand at a crossroads this morning with investors eager for central banks to acknowledge that the yield on bonds and wider interest rates can, and will still rise in the future. It may sound obvious to say, but as long as investors believe that the central bank will instead blame increasing bond yields on a recovering economy then those investors are well within their rights to keep selling those bonds, generating both volatility and a headache for those central bankers.

Seemingly, every Fed member will speak at some point this week with the Fed Chair joining in on Thursday.

We expect the USD to remain sold in the meantime, but this week is likely to be volatile in both directions.


Elsewhere

Overnight moves by the Reserve Bank of Australia have injected a note of positivity into the markets as investors bet on similar moves from other central banks to keep their interest rates low. The Reserve Bank of Australia upped its bond buying program overnight, buying both short and longer dated debt in a bid to keep yields low.

While the efforts of the RBA are laudable, bigger guns – Fed, ECB, BoJ or BoE – will need to fire to engender a wider feeling that the central banks are not to be messed with.

Have a great day.

Adam Wright
Cheif Market Analyst

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