Dollar sell-off continues as investors favour risk assets

The general theme witnessed in the FX market in the past few months has been evident again so far this week, with the US dollar and safe-havens falling against risk assets.

Every currency in the G10 has moved higher versus the greenback in the past seven days as investors become increasingly upbeat about the global outlook and price in large fiscal spending under the Biden administration. New caseloads of the COVID-19 virus have fallen fairly sharply across almost all of the developed world in the past few weeks, which is undoubtedly a positive for risk assets. New cases in the US are now at their lowest level since the beginning of November, with an average of new cases among the four largest nations in the Eurozone also at its lowest level since the start of the year.

The impressive progress being made towards mass vaccinations in the US is also likely behind at least some of the improvement in risk sentiment. Similarly to Biden’s proposed fiscal spending measures this is, on the one hand, likely to speed up the pace of the economic recovery in the US relative to its peers. Having said that, it also improves the outlook for the global economy, which is being perceived as generally positive for risk appetite. The euro has subsequently rallied above the 1.21 level versus the dollar, although is still underperforming most of its major peers as investors fret about the slow vaccine progress being made in the common bloc.

Pound hits new highs ahead of UK GDP numbers

On the other end of the spectrum, the pound continues to go from strength to strength, appreciating above the 1.38 mark this morning for the first time since April 2018. There has been no real economic news out of the UK so far this week, so investors have not had a huge amount of new information to go off. Friday’s preliminary GDP data for Q4 does, of course, run on a bit of a lag, but currency traders will be looking closely to see whether the UK economy avoided another period of contraction in the final three months of last year.

Aside from that, the latest vaccination numbers may continue to drive sterling trading. The pace of daily vaccinations has slowed slightly in Britain in the past few days, although remains far ahead of every other developed nation. The UK government remains on course to have vaccinated all the high risk groups by mid-February, and there is a general air of optimism that Boris Johnson could lay out a faster-than-expected unwinding in measures when he addresses the nation in a little under two weeks time.