he historical correlation between higher yields on US treasuries and a stronger dollar is not quite asserting itself as of yet, remarkably. European yields actually went down for the week in response to the dovish ECB meeting, but the euro managed to end the week unchanged against the greenback. Last week’s winners were, however, the commodity currencies in the G10 (Norwegian krone, Australian and Candian dollars) and Latin American ones, buoyed by higher oil prices.

The Federal Reserve March meeting on Wednesday will be the focus this week. While no change in policy is expected, markets will focus on its reaction to the significant increase in long-term yields and the notable jump in rate hike expectations for the year 2023, which are at odds with the Fed’s own forecast. The Bank of England meeting on Thursday rounds up the week in G10.

GBP

It is difficult to get a read on the true state of the UK economy right now, as numbers are obscured not only by the lockdowns but also the perhaps temporary depression in trade with the EU due to Brexit. The UK lead in vaccinations has supported the pound, particularly against the euro, but it is perhaps now fully priced in, and sterling is trading in a tight range without much conviction against either the common currency or the dollar.

The Bank of England meeting this week may actually be supportive for the pound. The MPC is expected to sound a more optimistic note, given the success in the vaccination rollout and the relatively aggressive fiscal support package announced by Johnson´s government.

EUR

The ECB made it clear that, unlike the Federal Reserve, it is concerned about the back up in yields and its potential impact on the economic recovery. It announced that it will front load purchases of sovereign bonds under the PEPP in order to combat the trend towards higher yields.

Remarkably, neither this significant development nor the poor European performance in both vaccinations and holding down cases generally made much of a dent on the euro, which ended the week in the middle of the table against its major peers, most notably the dollar. We think this resilience is meaningful and see potential for a euro rally if and when the European vaccination effort finally kicks into high gear.

USD

US fixed income resumed its sell-off last week. The moves were, however, relatively modest in magnitude, and the large auctions of Treasury bonds did not break the markets. While February inflation came in roughly as expected, other high frequency data like weekly jobless benefits claims are generally outperforming expectations.

As we explain above, the key for the dollar this week will be the Federal Reserve meeting. We will be watching very closely the update to the FOMC’s economic projections and any attempt to push back against rising bond yields. In particular, the discrepancy between the Fed’s own forecasts for no hikes until 2023 and a market that has started to price in a full hike early in 2023 will surely be brought up during the press conference.