Post date: 12/04/2021 15:19

US bond selling has abated and yields in Treasury bonds appear to be range-bound for now, with the 10-year rate oscillating between 1.60% and 1.75%. The dollar had a mixed week, pulling back against every G10 currency except the pound as well as most emerging market currencies. We do not expect the rise in interest rates to stop here, but we will need higher inflation numbers to propel the next move upwards. Meanwhile, expectations of an improvement in the Eurozone vaccination rollout in the second quarter are driving better sentiment in euro trading. It’s worth noting the massive clearing out of short USD positions among future speculators, which means that short covering will not support the dollar in the near term. The Central Bank of Turkey meets Thursday and will receive an unusual amount of attention after the sacking of the previous orthodox Governor by President Erdogan. On the economic front, we will be paying very close attention to the March inflation numbers out of the US, where we think supply chain disruptions and surging demand create conditions for an upward surprise.


Sterling experienced a mild bout of selling last week, as the PMIs of business activity were revised modestly lower and the UK’s vaccination rollout slowed as expected following supply disruption of the AstraZeneca vaccine. However, its performance so far in 2021 has been quite strong and given the positive fundamentals and the overall success of the COVID vaccination programme in the UK we expect this weakness to be short-lived. New daily virus cases and deaths have also both fallen sharply in the UK and restrictions are being eased as scheduled today with the reopening of pubs, restaurants, shops and gyms. Some near-term political jitters may delay a meaningful rally in the pound as we get closer to the 6th May Scottish parliamentary elections.


Last week brought mixed economic data out of the eurozone. The PMIs experienced an unusually large upward revision and German factory orders were strong, but February employment data came in weaker-than-expected. We think the former is more meaningful as the latter is a lagging data point. There are increasing signs that the vaccine rollout in Europe may improve significantly from now on, and we see room for the euro rally to continue now, especially since the short position overhang on the US dollar appears to have been cleared out. The one-shot Johnson & Johnson vaccine is set to be rolled out in the EU next week, which may help significantly speed up the so far very sluggish vaccine rollout in the bloc.


Among the second-tier economic indicators released last week in the US, we would focus on the Producer Price Index for March, a measure of price pressures at the wholesale level. This was a significant surprise, coming in much higher than the market had expected and confirming our view that price pressures are building in the US. Bond yields are taking a breather for now, but a potential upward surprise in the consumer inflation numbers out this week may provide a catalyst for another test of the top of the range there. Aside from that, we think that retail sales and industrial production data, both out on Thursday, could shift the US dollar in the second half of this week.