GBP/USD strengthened to fresh 34-month highs above 1.4100.

There was a further uncertainty over trends in global bond yields which increased overall volatility across asset classes.

Overall risk conditions were slightly more fragile amid valuation concerns. Wall Street equities pared sharp losses after Powell’s comments, but drifted lower again on Wednesday. Global bourses were also undermined by tech-sector losses with significant declines in Asia.

The dollar attempted to show some resilience, but with only a slight recovery from 6-week lows. EUR/USD faded from 4-week highs near 1.2180 amid selling pressure on the crosses. Sterling continued to post strong gains on re-opening optimism and GBP/EUR jumped sharply to 1-year highs. Commodity currencies recovered from an intra-day dip although choppy trading continued.

The Euro maintained a firm tone in early Europe on Tuesday and edged higher against the weak US dollar. EUR/USD peaked at 1.2180 before being subjected to a correction as market adopted a more cautious stance ahead of the Fed Powell’s testimony, especially with equities moving significantly lower.

US consumer confidence strengthened to 91.3 for February from a revised 88.9 the previous month and above consensus forecasts of 90.0. Although there was a slight decline in the expectations index, this was offset by a significant gain for the current conditions component.

Fed Chair Powell stated that the economic recovery remains uneven and far from complete while the path ahead remains highly uncertain. Powell added that it is likely to take some time for substantial progress on the Fed goals to be achieved and that the FOMC committee will clearly communicate well in advance of any change in the bond-buying pace. He was optimistic that there would be a strong second half recovery in the economy.

He added that the inflation rate remains below the 2% longer-run objective and the pandemic has had a significant imprint on inflation with prices particularly soft in sectors most affected by the pandemic. He also considered that it was unlikely that an increase in spending would lead to high inflation.

The dollar retreated again to 6-week lows following Powell’s comments with EUR/USD settling around 1.2150. The Euro was hampered on the crosses by reports that there will be a further shortfall in Astra Zeneca second-quarter Euro-zone vaccine supplies to the EU and EUR/USD was held just above 1.2150 in early Europe on Wednesday.

USD/JPY pushed to highs at 105.40 in Europe on Tuesday, but was unable to sustain the gains and gradually lost ground as the decline in equity markets curbed potential selling interest on the Japanese currency as markets continued to monitor developments in bond markets.

The US Richmond Fed manufacturing index was unchanged at 14 for February with a slight slowdown in the growth of new orders. There was a further solid increase in employment while prices increased sharply with the sharpest increase in the prices paid index for close to two years. The Philly Fed non-manufacturing index improved sharply to 3.9 for February from -17.5 previously which suggests that there was a notable improvement in services, although employment growth remained weak.

There was USD/JPY support below 105.00 with a slight recovery into the European close as the US currency attempted to stabilise. The yen was also hampered by an underlying lack of support for low-yield instruments. As Wall Street equities recovered, USD/JPY edged higher to the 105.25 area.

The House of Representatives will vote on the $1.9trn fiscal support package on Friday, but US equity futures lost ground lower in Asia. The yen lost ground as overall support for defensive currencies remained weak with USD/JPY nudging higher to just above the 105.50 level and EUR/JPY around 128.30.

The CBI retail sales index improved marginally to -45 for February from -50 previously, but this was weaker than consensus forecasts of -38. Retailers were also pessimistic over the short term outlook with the expected reading for March at -62 as the closure of non-essential retail continued to undermine activity.

Prime Minister Johnson was optimistic that there would be a full re-opening of the economy on June 21st and underlying Sterling sentiment remained strong despite fragile fundamentals. There were expectations that the UK economy would recover faster than the EU. GBP/USD strengthened to fresh 34-month highs above 1.4100 while the Euro weakened to fresh 11-month lows near the 0.8600 level. Sterling also posted a strong advance against the Swiss franc.

There were reports that Chancellor Sunak would extend the stamp duty holiday to the end of June and extend the furlough programme in next week’s budget. Sterling spiked higher in Asia on Wednesday with reports of stop-loss buying and option-related buying. GBP/USD surged to 35-month highs above 1.4230 before a corrective retreat to below 1.4200 with GBP/EUR jumping to 1-year highs above 1.1600 before a limited correction with solid underlying Pound support.

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