sharp jump in US bond yields in the past couple of sessions was likely the catalyst behind yesterday’s sharp move in the greenback. The 10-year Treasury yield has risen by 14 basis points since Thursday to around 1.29%, its largest daily move in three moves. Investors are clearly becoming increasingly optimistic about the long-term economic outlook, with higher yields on long dated bonds generally an indication that the market is expecting higher growth and interest rates down the line.

Macroeconomic data out on Tuesday also buoyed the dollar. The New York Empire State manufacturing index came in much stronger-than-expected, rising to 12.1 in February versus the 3.5 expected, its highest level since September. Investors will be looking for further signs that the US economy is powering ahead later today with the release of January retail sales figures. US consumer spending ended last year on a fairly weak footing, but recent vaccine optimism among consumers may be driving up demand and economists’ are penciling in modest growth in the measure. We expect this to be the biggest market mover today, with this evening’s FOMC meeting minutes unlikely to materially shift currencies, in our view.

GBP/EUR rises to nine-month high on latest vaccine numbers

While most major currencies ended lower versus the US dollar yesterday, the sell-off in the euro was particularly pronounced. The euro continues to underperform almost every other G10 currency at the minute, posting milder gains during risk on periods and larger sell-offs when trading is risk off. As mentioned in the past few weeks, we think that this has much to do with the slow vaccine rollout in the bloc – the EU has so far administered only only 5 vaccine doses per 100 people compared to 24 in the UK and 17 in the US. Economic data has actually been rather solid. GDP data out yesterday was revised modestly higher, while the German economic sentiment index from ZEW jumped to 71.2 from 61.8, its highest level in five months. Investors are, however, largely overlooking these upside surprises in favour of the bloc’s bleaker medium-term prospects.

Meanwhile, sterling continues to outperform, rising to a nine month high versus the euro this morning. With the UK’s vaccine programme making impressive progress, investors continue to price in stronger growth in the UK than many of its peers in the coming months. A modest move higher in inflation this morning to 0.7% is also a mild sterling positive, given its potential implications for monetary policy. The pound was, however, largely unchanged, with the market instead focusing largely on the latest vaccine numbers rather than macroeconomic news.