Morning Report – 18 February 2021

FX Moves


Global covid infections drop to the slowest pace since October at a time when vaccine distribution is chugging along. Combined with a stabilisation in the US yield curve, markets have finally found enough of a reason to take on risk again, with sterling enjoying this environment to recoup all of the ground lost over the last two days. Today, the data calendar is light for the pound, with just BoE member Michael Saunders scheduled to speak at 11:00 GMT on the immediate and longer-term impact of Covid-19 on workers. However, much of the focus remains on Westminster and any leaks of the government’s plans to reopen the economy. This comes after the Prime Minister’s comments earlier in the week which stated that the relaxing of lockdown measures will be cautious in order for them to be irreversible. Scotland’s Prime Minister, Nichola Sturgeon, has already announced that the national lockdown will remain in place until at least early March, with a blended return of schools beginning on Monday. While a devolved administration, Scotland’s lockdown policies have been closely aligned with that of England’s, meaning comments from Sturgeon could give a glimpse into what the easing timeline looks like in England ahead of Monday’s announcement.


The euro continued to trade on the back foot yesterday with headlines around the eurozone being light, however, this morning’s trading session saw a stronger euro against most G10 peers ahead of the European Central Bank’s 2020 financial report at 10:00 GMT and meeting minutes at 12:30 GMT. Markets will carefully analyse the minutes in search for keys on what ECB President Lagarde meant exactly when she stated in the latest press conference the central bank assesses financial conditions as a wide set of indicators beyond sovereign bond spreads. In the background, European markets remain sensitive to the slow-going vaccine rollout in the area which remains a drag on the euro. Later today, Mario Draghi’s new Italian government faces a confidence vote in the lower house, which should be an easy win after senators voted in its favour last night. Italian bonds may find support on the back of the confidence vote, while the euro will likely only quietly watch it from a distance.


It was another session of a strong US dollar yesterday as traders still decide how to trade in a market dominated by reflationary dynamics. US 10-year yields weren’t changed too much by the FOMC meeting minutes released last night, nor were they by relatively hawkish comments by Fed voter Barkin. Speaking yesterday, the Richmond Fed President said he was “actually quite optimistic” about the economic outlook, with the second half of the year expected to be “brighter”, especially for consumers. This was in line with what the latest batch of FOMC meeting minutes showed as members saw an improvement in the medium-term outlook since the December meeting, largely due to the prospect of increased fiscal support. The assumed spring fiscal package posed upside risks to the Fed’s outlook, with the package likely to cause the March Summary of Economic Projections to be upgraded. While the message from the Fed was rosy, the dollar is being weighed down today following two days of successive gains. From a data standpoint, the dollar’s focus will be on initial jobless claims data at 13:30 GMT, however, any downturn in the labour market will likely be offset by the acknowledgement that more fiscal stimulus is on its way. The impact of such stimulus was rammed down markets’ throats yesterday, when US retail sales data for January printed 5 times higher than expectations at 5.3% MoM, largely due to the impact December’s $600 stimulus payments had when delivered in early January.


The loonie remained broadly unchanged against its US counterpart throughout yesterday’s trading session but was trading firmer against most of its other G10 peers as the Canadian dollar found support in the deep freeze that curtailed oil production and sent crude prices higher. Yesterday’s inflation reading included an acceleration in annual inflation to 1% in January from 0.7% in December, just above the 0.9% consensus. Core inflation, which is a better measure of underlying price pressures as it excludes volatility from oil markets, saw a milder increase from 1.4% in December to 1.5% in January. Higher energy costs will likely keep inflation elevated in the coming months, however, the Bank of Canada anticipates inflation won’t sustainably return to its 2% target before 2023. With WTI currently trading above $61, the focus today will be on the Department of Energy’s US inventories release at 16:00 GMT. This comes as traders and executives state that more than 4m barrels of US oil output are now offline due to the deep freeze in the Midwest, while yesterday’s API data saw US inventories fall by 6m barrels.


Source: Monex Europe