he US 10 year treasury yields now nearly 0.50% more than it did at the beginning of the month, when a buying panic at the prospect of endless central bank accommodation brought it below 1.5%. The realisation that a world recession is not imminent has turned the panic buying of government bonds into a near panic selling. As usual when yields spike, the Yen has underperformed significantly. Notably, the dollar has not benefited significantly from the higher differential between US and European yields or the significant easing announced by the ECB. Emerging market currencies were also outperformers last week.

This week FX markets will look to central bank meetings for direction. In addition to the Bank of Japan, the Federal Reserve meets on Wednesday, with markets pricing in a 25 bp cut as a near certainty. The Bank of England meets Thursday, though we expect no market-moving news to come out of this. Inflation data out of the UK and Japan will round up the week.

GBP

Sterling continues to surge as the prospects of a no-deal Brexit recede.Parliament was able to pass a law forcing the Government to seek an extension rather than face a no-deal Brexit. Betting markets now place the odds of such an event at around 20%, down by around half from the peak. Our prediction that no resolution of the Brexit problem is possible without a general election appears to be the central scenario now. Economic data continues to defy expectations of a Brexit-induced collapse in confidence. With the chances of a no-deal outcome receding, we think it is quite likely that the Pound rally will continue for the next few weeks. We expect the Bank of England to stick to its recent line and give little further information about monetary policy, as it awaits the outcome of the Brexit negotiations.

EUR

The ECB meeting delivered a mixed result. The rate cut and the monthly asset purchase targets were smaller than expected, but on the other hand QE willl now be open ended until inflation has clearly returned to target. There was considerable resistance from hawkish members of the council, however, and markets chose to focus on this and send the Euro soaring soon after the meeting. The threshold for further monetary easing is probably very high now. This is probably a positive for the Euro, especially if the noises we are hearing regarding fiscal easing in core Europe materialize into meaningful stimulus.

USD

The relentless rise in US yields, which has fast outpaced every other G10 sovereign debt market, has done little to help the dollar rally. The Federal Reserve meeting on Wednesday will be a particularly fraught one. The more so because last week inflation report shows inflation on a clear uptrend. The core rate that excludes volatile food and energy components has been above the Fed target for 18 months now, and is now at the highest level since the great financial crisis of 2008-9. While a cut in the rate seems to be a certainty, the extent to which the uptrend in inflation gives ammunition to the FOMC hawks will be the key to the meeting.