EUR / USD
The final Euro-zone PMI manufacturing index was revised slightly to 57.9 from the flash reading of 57.7 which provided an element of Euro support.
German consumer prices increased 0.7% for February with the year-on-year rate at 1.3% from 1.0% and above expectations of 1.2%. The data maintained reservations over the potential for increased inflation pressures within Germany and the Euro-zone.
There were, however, further dovish comments from the ECB with council member Villeroy stating that much of the recent increase in bond yields is unwarranted and that the ECB must react against it. The remarks sparked speculation over dovish rhetoric and possible further action at next week’s policy meeting.
There was a significant decline in Italian yields following the comments and the Euro also lost ground with a retreat to below 1.2050 against the US dollar.
There was a marginal revision for the US PMI index to 58.6 from the flash reading of 58.5. The ISM manufacturing index strengthened to 60.8 for February from 58.7 previously and comfortably above market expectations of 58.8. There was stronger growth in new orders and production growth while employment increased at a faster pace. There was a further increase in the prices index to 86.0 from 86.1 previously and the highest reading since May 2008 which will maintain underlying concerns over increased inflation pressures. The data overall provided support for the US currency amid expectations of US out-performance.
The Euro attempted to regain some ground later in the session, but the dollar overall was able to resist selling pressure and the single currency settled below 1.2050. Higher bond yields continued to underpin the US dollar on Tuesday as it traded at 3-week highs with the Euro around 1.2020 as commodity currencies drifted lower.
Source reports suggested that the Bank of Japan is prepared to resist domestic bond yields increasing too far ahead of the bank’s next scheduled review. Expectations of domestic yield control maintained a lack of yen demand and the overall yield structure underpinned the US currency.
Wall Street futures posted sharp gains and the dollar posted further gains to 6-month highs near 106.90 at the European close.
Richmond Fed Barkin commented that higher bond yields were a reflection of hopes for a recovery and vaccine optimism with Treasuries dipping lower following the comments. San Francisco head Daly was more dovish with comments that the central bank must ensure that no one is left behind in the recovery. Nevertheless, there were expectations that the Federal Reserve would tolerate higher yields which continued to underpin the US dollar.
US equity futures edged lower on Tuesday which curbed the potential for fresh dollar buying and the dollar settled around 106.85.
The UK PMI manufacturing index was revised higher to 55.1 from the flash reading of 54.9. Mortgage approvals declined to 99,000 for January from a revised 102,800 the previous month, although this was above consensus forecasts of 96,000. Overall mortgage lending remained strong on the month, but there was a further net repayment of consumer credit and overall consumer lending declined to £2.8bn from £4.5bn the previous month. There was an annual decline in consumer credit of 8.9% and a fresh record low for the series. Spending will be weak in the short term, although there could be a release of savings later in the year.
Bank of England Deputy Governor Ramsden stated that the bank wants to have the tool of negative interest rates in case recovery forecasts don’t materialise.
Sterling gained an element of protection from a recovery in equity markets and overall optimism surrounding the UK vaccine programme was sustained.
The UK currency was, however, capped below 1.4000 against the dollar and retreated to lows near 1.3900 while the Euro settled around 0.8650 from lows near 0.8620. There was some evidence that Sterling buying was fading and it dipped below 1.3900 to 1.3880 against the dollar on Tuesday with the Euro holding above 0.8650.
Swiss sight deposits declined to CHF704.1bn in the latest week from CHF704.4bn the previous week, suggesting that the National Bank had not intervened to enhance franc losses. Swiss PMI manufacturing index strengthened to 61.3 for February from 59.4 and above consensus forecasts of 60.0.
There was a hesitant tone in early Europe, but the franc gradually lost ground as global bond yields increased and selling pressure increased as US equities posted strong gains. The Euro strengthened to highs around 1.1030 while the dollar posted 15-week highs around 0.9160 at the European close.
The Swiss currency was able to resist further losses on Tuesday, although the dollar was able to hold above 0.9150 amid the firm overall tone.