The rally in risky assets and especially stocks has paused today as bond yields reversed an earlier loss after a four-day slide. The 10-year US Treasury, probably the most important benchmark for global borrowing, is trading around 1.66% as traders await the minutes from the most recent FOMC meeting released in a few hours.

Concerns about higher borrowing costs destabilising markets have eased and this has kept the pressure on the resurgent dollar which is mildly off, for a third straight day. Interestingly, many analysts are presuming we are now stuck in a holding pattern and will trade sideways in many assets as a lot of the good news is now priced into the markets. With that, the VIX is now trading below 18 at levels not seen since February last year, before the start of the spike of all spikes when the “fear gauge” went to the moon and hit above 85 within the matter of a few weeks.

That said, with this sense of complacency can often come a shock. Does the (soon) booming US economy cause rising inflation rates which forces the Fed to react sooner than thought, with higher interest rates? There are other clear dollar-negative factors like positioning and seasonals which are turning more negative.  It was the sixth successive week that USD shorts have been cut back leaving trader’s overall exposure to the short USD trade at its lowest in a year. We have written before about seasonal trends over the last three decades as dollar demand generally strengthens in the first quarter, topping out around the end of March before clear underperformance through the second and third quarters.

Sterling labours

GBP is the worst performing major currency on the week so far amid concerns over the UK’s vaccine rollout. Question marks are continuing to circle around the much-used Oxford Astra Zeneca shot and the issue of blood clots with stories that it will now not be given to under-30s, even as the country embarks on giving out a third different vaccine, this one developed by Moderna.

But collapsing infections and especially hospitalisation numbers should continue to give GBP solid support in the medium-term as the economy opens up far quicker than the continent.

The 5% year-to-date decline in EUR/GBP, as of 5 April, is among the sharpest falls in the history of the cross, reflecting the stark difference in growth prospects. Of course, this also reflects a starting point which was one of the weakest GBP levels since then as well. This week has seen bullish momentum hold off a drop below 0.85 and two super-strong up days has taken the pair back to levels seen at the start of March.

The zone around 0.8645 did represent previous resistance and we are now overbought on the four-hour chart. The 50-day moving average is also near this area so we would expect a pause in the retracement fairly soon.

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