Mon, Mar 01, 2021 @ 06:14 GMT
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Sunset Market Commentary

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Sterling grabbed the market spotlights in an otherwise calm trading session. At the onset of European dealings, EUR/GBP hovered around levels seen earlier this week, close to, mostly slightly below 0.89. This initially continued after the release of (marginally) higher than expected UK December inflation (headline rising from 0.3% Y/Y to 0.6% Y/Y, core at 1.4% Y/Y from 1.1% Y/Y). At these levels, prices are far away from the BoE 2% target and won’t change the Bank’s assessment at the February 4 policy meeting. Still, at the open of cash markets (CET 09 00) sterling received a strong bid. EUR/GBP soon went for a retest of the 0.8865 level. After at least five rejected tests since June of last year, the pair this time broke below this high profile reference. We didn’t see any compelling news to support the move. Are investors pricing a scenario that faster UK vaccination compared the EU might cause the UK to front run on the way to (economic) normality? Or are they still pondering declining chances of a negative BoE policy rate after recent skeptic comments of BoE governor Bailey? At least (ST) UK yields changes are limited. Maybe some underlying euro caution ahead of tomorrow’s ECB meeting also facilitated the move. Whatever the reason, sterling is trading at the strongest level since May last year against the euro. The jury is still out but if EUR/GBP would close the day/week below this reference, it would improve the short-term picture for the UK currency. 0.8671/21 is a next technical area on the graphs. Cable also touched the strongest level since May 2018 (1.3718 area). EUR/GBP selling this morning also hindered the EUR/USD performance. The euro underperformed the broader USD decline at that time. EUR/USD dropped off the intraday top near 1.2158. The pair traded in the 1.2120 area around noon. Later, a tentatively stronger dollar added to the EUR/USD decline. EUR/USD is trading in the 1.21 area. The trade-weighted dollar also reversed initially softness and returned into green (90.53).

Aside for the repositioning in sterling, there were few important data to inspire trading. The media focus is on the inauguration of Joe Biden as the 46th President of the US. The new president is expected to announce several ‘day one’ executive orders. However, they probably won’t yield a big surprise for markets. US equities continue yesterday’s rebound (S&P +0.6%, Nasdaq +1%+). European indices are gaining  0.5%/0.75%. Oil turned north again after a limited setback earlier this week (Brent $56.5 p/b). US yields are gaining up to 1.1 bp (10 & 30-y). However, at 1.10%, the US 10-y yield basically stabilizes from last week’s spike (1.18%). German bunds slightly outperform US Treasuries with yields declining less than 1bp. At its policy meeting tomorrow, the ECB is expected to keep the policy rates and asset purchases unchanged. Chair Lagarde probably will commit to keep monetary conditions accommodative across the euro area as needed. She might receive questions on the impact of the strong euro on ECB policy and whether ‘Yield Curve Control’ could be part of the ECB’s toolkit. 10-y intra-EMU spreads versus Germany were little changed. Greece slightly outperforms (-2 bp). The Italian spread widened 2 bp even as PM Conte survived a confidence vote in the Senate yesterday.

News Headlines

The Dutch government proposed imposing a nationwide curfew to curtail the spread of the (new) coronavirus (mutation) in the country. Parliament has yet to approve the measure which would allow only people with urgent needs to leave their homes between 8:30 pm and 4:30 am. The curfew would be the first since World War II and is proposed along with a ban on flights from South Africa, South America and Britain.

Canadian inflation underwhelmed in December. Headline inflation declined 0.2% m/m (slowed down to 0.7% y/y from 1% in November). Core measures also came in below expectations, averaging to 1.57% vs. 1.67% in November. All but two categories weighed on (monthly) inflation, including clothing & footwear (-4.3% m/m), health & personal care (-0.5% m/m), food (-0.2% m/m) and shelter (slowed to 0.0% m/m).

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This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.

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