XE Market Analysis: Europe - Mar 15, 2021
The dollar retained an underlying bid, with U.S. Treasury yields remaining buoyant, near Friday's highs. The DXY dollar index lifted to a high at 91.87, gaining on Friday's closing level but so far remaining shy of Friday's high. The 10-year T-note yield settled around 1.620-1.630%, just below the 13-month month highs seen at the end of last week. The theme of rising yields with a concomitant rising dollar is likely to continue into the FOMC meeting and Wednesday's monetary policy announcement. With the U.S. economy having recovered much quicker than assumed even before the gargantuan fiscal stimulus spending spree began, the Fed will be obliged to make another round of sizeable upward revisions to GDP and inflation projections, as already seen in September and December last year, alongside another downward revision to unemployment forecasts. The Fed will no doubt still repeat that there is a long way to go to restore the labour market to pre-pandemic levels, which is the requirement before any tightening will be put in place, though markets are already looking several steps ahead, considering the possibility that the outsized stimulus, coupled with a global economic recovery as Covid vaccinations are rolled out, could lead to economic overheating, the prospect of which could force the Fed into tightening mode earlier than anticipated. The Fed, while acknowledging the brightening outlook, will still accompany this with the caveat of ongoing downside risks from the virus, particularly the risk that new variants pose to the efficaciousness of existing vaccinations. Note that production and retail sales data out of China came in above expectations today, which has maintained the reflation trade. Against this backdrop, the yen has continued to weaken. USD-JPY printed a fresh nine-month high at 109.36. Yen crosses remained underpinned, with EUR-JPY and CAD-JPY, for instance, posting fresh major trend highs. Elsewhere, cryptocurrencies have continued higher. Bitcoin forayed into record territory above $60,000. Asian stock markets mostly rallied. The BoJ and BoE will be announcing on monetary policy this week (on Thursday and Friday, respectively). BoE Governor Bailey said to the BBC today that the recent rise in yields is that it was "consistent, I think, with the change in the economic outlook." The BoJ, meanwhile, is under pressure to expand the target rage in its yield curve control program, and may announce a phasing out of numerical targetting.