Sterling holds gains vs. dollar

Sterling slipped lower versus the dollar on Tuesday but retained most of its gains achieved against the greenback following a strong recovery at the start of the week.

The pound has traditionally traded in line with risk sentiment in global markets. On Monday, a recovery in global stock markets on Monday helping to strengthen it after an almost 2% dip last week.

On Tuesday, the sterling was 0.2 percent lower against the dollar at $1.3697 at 0818 GMT, although it was still hanging onto its Monday rally. It was 0.1 percent lower against the euro, at 85.68 pence.

What we witnessed yesterday was the pound, along with other high-beta G10s, riding the coattails of the optimistic sentiment observed in global equities markets. It was a dramatic contrast to last week, said Michael Brown, senior market analyst at Caxton FX. The market is consolidating this morning, which is unsurprising given the significant surge saw yesterday.

Eurozone bond yields

Eurozone bond rates edged up on Tuesday, with investors focusing on issuance in a data-light morning, as risk sentiment improved on the back of lowering Fed tapering fears and final US approval of the Pfizer/BioNTech vaccine. That came after a week of decreasing bond yields as investors sought shelter in bonds in the face of a spreading coronavirus and fears of a slowing in US Federal Reserve asset purchases.

Germany’s 10-year yield, the eurozone’s benchmark, was up one basis point to -0.47 percent at 0712 GMT on Tuesday. On course for the second session of gains, it was still somewhat lower than Monday’s one-week peak of -0.457 percent.

Finland, Germany, and Italy

Italian 10-year bond yields were constant at 0.59 percent, with the highly watched spread to German 10-year yields at 105 basis points (bps), down from Monday’s three-week peak of over 107 bps.

With little data to focus on in the eurozone before the Federal Reserve’s Jackson Hole symposium on Friday, the focus was on supply.

According to a lead manager memo obtained by Reuters, Finland has begun selling a five-year bond for three billion euros ($3.52 billion). Germany will raise 3 billion euros from the reopening of an auction for a seven-year bond.

In the run-up to Jackson Hole, the supplied argument underpins the case for higher (interest) rates, and ING analysts told clients.

They wrote that Treasury auctions and debt sales from Finland, Germany, and Italy this week are doable but should weigh on bond direction due to reduced liquidity circumstances.

Outside of the eurozone, the United Kingdom will raise 3 billion pounds in a five-year auction. In contrast, the United States Treasury will raise $60 billion in a two-year auction, followed by additional issuance in various maturities this week.