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Quiet day for economic data, bond yields in focus

Quiet day for economic data, bond yields in focus

We have a very quiet day ahead in terms of the fundamental data that’s set to be released, but the big talking point is likely to be bond yields. The US 10 year Treasury bond is now delivering a yield of more than 3% for the first time since 2014 and that means holding US cash deposits is getting ever more popular. In the absence of other factors, the greenback may well be poised for further gradual appreciation although today’s lull for data is set to be incredibly short lived.

Despite a few surprises in terms of economic data yesterday, the fall-out for currency markets was rather muted. The forward looking German IFO sentiment reading came in well below expectations and although this pushed EUR/USD down to session lows, the weakness was not  sustained. With the pair having lost two cents in a week and closing in on three month-lows, the appetite for further selling seems rather limited.

Another shock reading was the US consumer confidence print which bucked expectations and returned to growth. Coming against a backdrop of rising interest rates, this was by far the most acceptable outcome however and plays to the idea that the US economy continues to fire on all cylinders. The lack of any real rally off the back of this data does however lend support to the idea that the good news is all priced in and the market is not  changing its view that the next US rate hike will be seen in June.

Rounding matters off, the UK government announced a landmark of its own yesterday with the public sector borrowing figures. For the first time in sixteen years - once you strip out capital spending - a surplus was recorded. The amount being spent on running the country is covered by tax receipts. The news helped drive cable off those one-month lows and assuming the surplus is sustainable, this should have some longer term benefits for the pound too. With less debt needing to be issued in the future, UK Gilt yields should rise and in turn this may provide some support for sterling.

The pair broke its week-long losing streak yesterday off the back of that UK government borrowing data and managed to add as much as three quarters of a cent at one point. However, the allure of a high yielding dollar already seems to be eroding some of these gains. Chart below.

EUR/USD paused for breath on its run lower yesterday, but the possibility of a return to the lows from early March remain on the table. The absence of any meaningful economic data from the Eurozone in the short term will have the potential to weigh.

The pair is grinding its way higher from last week’s lows, although gains since Friday are currently a mere 0.6 cents.