Sterling was unable to make headway on Friday with further reservations over the UK economic outlook and a narrowing of yield spreads compared with other major currencies. A net advance in major UK equities also failed to underpin the UK currency during the day. Traders looked to challenge higher against the dollar and managed to push the UK currency below this level for the first time since November 2020, although it did manage to close above this level on short covering. CFTC data recorded a further small increase in short Sterling positions to just below 42,000 contracts from just above 40,000 previously and the largest short position since the beginning of 2022. The substantial positioning will maintain the potential for short covering if there is a shift in UK sentiment, but UK confidence is liable to remain fragile in the short term which will limit Sterling support. The latest UK data was weaker than expected with the February GDP increase held to 0.1% as industrial production declined on the month.
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Final opinion polls ahead of the first round of the French Presidential election indicated 26% support for President Macron and 24% for Le Pen which maintained some unease that Le Pen was gaining momentum. The Euro was also undermined by concerns over a widening of peripheral yield spreads, especially with renewed fears over stagflation and potential recession in Italy. The surge in energy prices will also cause widespread economic and political stresses within the Euro area. Overall Euro confidence remained fragile and it dipped to fresh 1-month lows against the strong dollar. Towards the European close there were reports that the ECB is crafting a tool that would be deployed if there was a jump in peripheral yields. According to sources, the central bank has not yet decided whether the instrument should be deployed pre-emptively or held in reserve. Exit polls for the first round of the French Presidential election indicated that President Macron recorded around 28% of the vote and just over 23% for National Front leader Le Pen. There was an element of relief over the Macron performance as he exceeded expectations, but also concerns that Le Pen had momentum into the run-off. The Euro spiked higher at the Asian open on immediate relief but was unable to hold the gains with a quick retreat.
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US Treasuries continued to lose ground on Friday with further concerns surrounding the underlying inflation outlook. The 10-year yield settled just above the 2.70% level which helped underpin dollar confidence while there was little change on Wall Street equities. The dollar posted strong gains as CFTC data recorded a further increase in the net short yen position to near 104,000 contracts, the largest short position since November 2021 and close to record highs. There will be scope for aggressive short covering if there is a dip in US yields, although Fed tightening expectations are likely to dominate for now.
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