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2021 trends continue to play out as risk assets rise in parallel with yields

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22 February 2021

Written by
Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.

The holiday-shortened week in the US saw a continuation of the market tendencies seen since the beginning of the year.

overeign debt sold-off as investors balk at returns that are well below projected inflation, even as inflationary pressures build. Meanwhile, financial assets worldwide generally rose, though the move was uneven. Equities rallied only modestly, while commodity prices continue to soar. Currency moves were also mixed, though most high risk currencies rallied against the US dollar. Sterling and commodity currencies performed well in the G10, and the Chilean peso continues to rally strongly on the back of soaring copper prices and the country’s impressive vaccine rollout.

This week the key will be Federal Reserve Chair Powell’s semi-annual testimony to Congress. We expect Powell to maintain the ultra-dovish messaging of the past few weeks. It will be interesting to see if the growing concerns about inflation receive any air time in the questions. Inflation will definitely be the focus of the week’s macroeconomic releases. Revised Eurozone CPI numbers for January come out on Tuesday, and the Fed’s preferred measure of inflation in the US, the PCE, comes out Friday. We see room for upside surprises in the latter.


Sterling continues to rise on the back of positive vaccination data and fading fears of immediate economic disruption due to Brexit. The PMIs of business activity out last week provided further support. They came out much stronger than expected and suggest the economy is coming back from the lockdowns faster than expected. Retail sales on the other hand dropped sharply in January, although this came as little surprise to the market, despite the very conservative consensus estimate.

The employment data out this week are lagged and should not move the market much. We would expect the currency to take a breather here after the sharp rise of the past few weeks, particularly if the leaked timetable for an unwinding in lockdown measures is to be believed, which appears far more cautious than the market had probably expected. We’ll receive official confirmation from Prime Minister Boris Johnson later this afternoon.


The slight improvement in the PMIs for February masked a dichotomy between the soaring manufacturing sector and a services sector still hobbled by widespread lockdowns. We expect the services PMI to start improving as early as next month, as the lockdowns are relaxed across the continent.

Next week’s flash inflation report for February out on 3rd March is shaping up as the key event in the next fortnight. The sharp rebound in the core measure, from all time lows of 0.2% to 1.4% YoY in January, could be ascribed to one-off factors, but if the rise continues it will become harder to deny the build up of inflationary pressures.


The US progress in vaccinations was briefly delayed by the electricity blackouts in Texas, but the new case numbers continue to drop precipitously, albeit this is partly due to less testing.

The main news in the US was, however, a massively strong number for January retail sales, and the continued back up in Treasury yields as signs of a strong recovery and inflationary pressures building up, under the indulgent gaze of the Federal Reserve and prospects of further fiscal stimulus. We think it is significant that even though real Treasury yields have now started to follow nominal ones on the way up, the US dollar has yet to benefit in a significant way.

We expect both rates and currency markets to remain in a holding pattern waiting for the key number of the week, PCE inflation numbers out on Friday.