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Global market watch - 1st March 2021

Last week was interesting, with sterling making new highs against the dollar and euro at levels not seen since 2018 for GBP/USD, and February 2020 for GBP/EUR. The major event this week will be the UK budget delivered at lunchtime on Wednesday by Chancellor Sunak. We suggest that he will keep the Covid-19 assistance going in the shape of the furlough scheme and support for business. We do note that Tory MPs have already been warned that if they vote against the budget they will face censure by the Party, and in this case we propose that Sunak will introduce business tax hikes to try and reclaim money that has been spent on the pandemic. Hopefully any tax increases will be proposed to start after another 6 or 12 months, as a strong case can be made that the economy is still too weak for tax hikes. On a technical basis, it wouldn’t surprise if GBP/USD made a larger correction lower before resuming its trend higher. GBP/EUR could behave in a similar fashion. However, there is a possibility that GBP/EUR could just continue its ascent immediately.
EUR/USD is still stuck in its broad 1.1952 - 1.2349 range. Last week saw EUR/USD fall from the mid 1.22 level, and the technical view is that we may see more corrective moves lower this week. ECB President Lagarde speaks today, and we have German retail sales on Tuesday. Eurozone retail sales and the unemployment rate will be released on Thursday after the ECB’s economic update. The reason for last week’s EUR/USD decline was USD strength. It could be that EUR/USD remains in its recent range this week.

The House of Representatives passed the President’s stimulus package for $1.9 trillion, and it now goes to the Senate where the Democrats have the slimmest of majorities. It needs to be made law before March 14th to be in place to provide assistance before jobless benefits end. However, the main focus is the bond market where investors are concerned about inflation rising because of the extraordinary amount of liquidity being added to the market. Bond yields rallied sharply last Thursday, before stabilising on Friday. 
The dollar rallied sharply as well, and this saw the DXY push higher. The market is looking to the Fed to see if they will try to push interest rates lower in an exercise called ‘yield curve control.’ If they do, then we would expect the dollar to move immediately lower, if they don’t, then we suggest that the dollar could continue to strengthen. The biggest economic release is Friday’s Non-Farm Payrolls, and we expect 133k new jobs to be added to the economy last month. Average hourly earnings are suggested to rise 0.2% and the unemployment rate squeeze higher to 6.4%.

The AUD traded above 0.8000 last week and promptly fell back quickly. It hadn’t traded above 0.8000 since 2018, so a correction lower is not a surprise, and as such the current trend higher for AUD/USD is still in force. The Reserve Bank of Australia sets interest rates on Tuesday, and we suggest no change here. We then have GDP on Wednesday and retail sales and trade balance data on Thursday.

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