Rising yields fail to support the dollar (Daily analysis 22.02.2021)

The reflation theme continues to drive the markets. Equities grind lower as higher yields undermine this asset class's attractiveness while industrial commodities continue to trade bid.

As far as the FX is concerned, the pound sterling still dominates, and the US dollar is in the red. The GBP/USD pair tries to settle above the 1.40 mark while the EUR/USD bounce once again fades around 1.2150.

The bond market takes the lead

At the start of this year, in the financial markets, everything is focused on debt. Rising yields of government bonds are rooted in the belief that the global rebound in economic growth supported by governments and central banks' efforts will result in a return of inflation. This trend's dominance is not in doubt, but there are extremely different opinions as to the course and significance of the processes taking place. Questions arise as to whether rising yields are undermining the bull market in global equities.

Some investors may be concerned about overheating in the US economy, which is due for additional support any day now. A group would like to start betting that the Federal Reserve will abandon its bailout policy form later this year. The trouble is that neither of these factions has sufficient arguments on their side. Information coming from the economy, e.g. the USA, is contradictory: strong growth in the dynamics of retail sales and industrial production contrasts with the labour market's weakness. Inflation, although it will inevitably intensify, so far shows no signs of getting out of control. This translates into a wait-and-see atmosphere and jumpy, jagged movements in exchange rates. In the end, we assume that the dollar will emerge from the current turmoil weaker and risky currency markets stronger. However, it is hard not to see that in moments of nervous bond selling, the riskiest currencies in the basket (including the ruble) get hit. Yet, these troubles should be seen as temporary.

Central bankers in the limelight this week

Reaction from central banks will play a key role in future trends. The next few days will be a festival of their speeches. On Monday, Christine Lagarde speaks at the European Parliament, a day later, the head of the Federal Reserve, Jerome Powell, will testify in Congress. On Wednesday, Deputy Governor Richard Clarida's speech is scheduled.

As far as macroeconomic readings are concerned, in addition to Monday's Ifo reading, which confirmed the positive conclusions of Friday's PMI reading for Germany, attention will be focused on Thursday's US labour market data and Friday's readings of the Fed's preferred measure of inflation, the GDP growth revision and the consumer sentiment index.