Positive risk sentiment returns – Market Overview

Positive risk sentiment returns – Market Overview

The 10-year U.S. bond auction, awaited with interest in the markets, turned out to be better than initially predicted.

With a high bid-cover ratio and only one basis point above the starting price, the auction proceeded without major surprises. Consequently, the bond yield fell below the 1.50% level, eliminating any market concerns.

The CPI data published yesterday has also contributed to this improvement in market risk sentiment. At the moment, the dreaded inflationary pressure is not reflected in the data.

The inter-annual core inflation for February fell to 1.3%, compared to the expected figure of1.4%. This is the most relevant data when assessing a possible inflationary pressure by the Federal Reserve. Still, it might be premature to consider that all danger has vanished since February is still an early date for the effects of rising consumption to be fully reflected in the data. Therefore, confirmation of this figure will be required.

Another critical factor potentially explaining the market’s positive reaction is the definitive approval and prompt implementation of the U.S.' 1.9 trillion fiscal stimulus package. This will allow American citizens to receive $1600 checks, probably consumption and retail sales figures.

The U.S. Dollar gave back some of its gains against all its peers, with the sole exception of the Japanese yen, which also weakened in the face of a scenario of greater risk appetite.

The DollarIndex saw a downwards correction after reaching the 0.618% Fibonacci retracement level, corresponding to the bearish trend that began in the first days of the month.

If this move is a technical correction or the index will resume its upward path and exceed the critical 0.618% Fibonacci level will largely depend on the performance of U.S. long-term bond yields. Should they experience upward tensions again, the Dollar would strengthen.

Also, the price evolution of the EUR/USD pair could have an influence as well. This pair has corrected up to an intermediate resistance zone around 1.1975 due to the Dollar’s weakness. But this afternoon's ECB meeting will be of great relevance for the euro's future. All the market's attention is focused on both the committee's assessment of the future of the European economy and President Lagarde's comments in search of further clues about the central bank's intentions.

Any assertion or suggestion about a potential increase in expansionary monetary policy, such as an intensification of its asset purchase program, could harm the euro.

Sources: Bloomberg, FT.

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