Sterling stumbles on global inflation fears after US and European bond yields sell-off

Mon 1 Mar 2021
Posted by: William Barns-Graham
Features

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President Biden finally got his Covid-19 recovery stimulus package passed by Congress last week, though the news caused some jitters in the markets amid suspicions that the plan could lead to inflation.

According to the FT: “The global bond market is suffering its worst start to a year since 2015 as investors grow increasingly confident that the rollout of Covid-19 vaccines will boost economic growth and fan serious inflationary pressures for the first time in decades.”

Global equities and currencies, including Sterling, have fallen in value after a mass sell-off of US and European bond yields, though the US dollar has benefitted due to its safe-haven status.

This led to the US Dollar Index (DXY) – the gauge of the US dollar’s strength – rebounding from a monthly low of around 89.70 to open this morning at 90.97.

Pound suffers

The pound suffered more than the euro due to its status as a ‘risk’ currency since the pandemic struck last year.

Sterling had been continuing to spike in the first half of last week on the back of the UK’s successful vaccine rollout. It hit its highest value since April 2018 against the US dollar at $1.42 and its best level for a year against the euro at €1.17 before the inflation jitters hit.

It then dropped sharply, trading back below US$1.39 and as low as €1.147 before recovering slightly at the end of the week.

ECB to intervene

So far, the only central bank to express concern at the rise in US bond yields has been the European Central Bank (ECB) which hinted at interventionist action to counter fears of inflation.

This may lead to a period of euro underperformance.

Oil maintains strength

Oil has maintained its recent strength, rising from just below US$60 per barrel to a post-pandemic high of $63.80 last week as demand increases on the hopes of global vaccine-led economic recoveries from Covid-19.

Cryptocurrency

Bitcoin’s recent surge took a hit though, with the cryptocurrency falling from US$58,000 at the start of the week to a low of around $43,000 over the weekend just passed.

It has since recovered some ground, but US Treasury Secretary Yellen last week warned that cryptocurrencies are an inefficient way to conduct monetary transactions, underlining scepticism from governments and central bankers over their viability.

Week ahead

Federal Reserve (FED) Chair Jerome Powell is scheduled to speak on Thursday and may take the opportunity to push back against the ongoing rise in yields.

Chancellor Sunak’s spring Budget announcement on Wednesday would usually be a neutral event for the pound. However, if as expected there is an extension of the furlough scheme and other supportive measures, this, alongside the UK’s vaccination programme, could support the pound in coming weeks.

Economic data 

Highlights this week include:

Today (1 March)

  • Global manufacturing PMIs for February
  • German Consumer Price Index
  • Speeches from:
    • ECB president Lagarde and vice-president De Guindos
    • US Federal Open Market Committee (FOMC) members Williams and Brainard

Tuesday        

  • German unemployment and retail sales data
  • Eurozone inflation report
  • US API weekly crude oil stocks data
  • Speeches from:
    • Brainard again and fellow FOMC member Daly

Wednesday  

  • Global services and composite PMIs
  • UK Budget
  • US Crude oil inventories
  • Speech from:
    • Bank of England (BOE) Monetary Policy Committee (MPC) member Tenreyro

Thursday       

  • Construction PMIs
  • Eurozone inflation and retail sales data
  • US Weekly jobless data and factory orders
  • Speech from:
    • FED chair Powell

Friday             

  • German factory orders
  • US employment report for February and trade balance
  • Speech from:
    • MPC member Haskel