EUR

The euro was trading in the red against most of its G10 peers over the course of yesterday but found some support overnight on reports that former European Central Bank President Mario Draghi may become the next Prime Minister in Italy. Italy’s head of state, Sergio Mattarella, will meet Draghi today to give him a formal mandate after multiple rounds of talks failed to seal an agreement among parties on a new premiership under Giuseppe Conte, who had hoped to make a comeback. Italian bonds are loving the news, with BTP futures rising as much as 108 ticks to reach a two-week high as Draghi’s return means the prospect of snap elections would be avoided. Draghi’s acceptance of today’s mandate would likely extend the trend and give further support to Italian bonds while narrowing the premium over its German counterpart. While the prospects of early elections fading helped Italian assets to gain, the euro seemed unimpressed by the news as current lockdowns and vaccine distribution divergences continue to dominate markets. In the Netherlands,  Dutch Prime Minister Mark Rutte extended almost all of the strict lockdown measures on Tuesday for at least a month following the rapid spread of the more transmissible variant. So far, the EU has administered just 3 doses per 100 people, far behind the 15% in the UK and 10% in the US, but still plans to have 70% of the adult population vaccinated by the summer to allow easing of restrictions.

USD

Despite the improvement in risk appetite and good day for global equity markets yesterday, the dollar has been mildly offered, performing significantly better than JPY and CHF. Domestic developments regarding fiscal stimulus plans continue to be in focus as Joe Biden’s $1.9tn plan may benefit from reconciliation in the Senate, increasing the chances of securing approval by Congress as the fast-track process exempts Democrats from needing the 60-vote threshold and only requires a simple majority. With a 50-49 vote Tuesday, the Senate opened the debate on reconciliation which will be further voted on by the House later this week. The Senate will take up final passage of the resolution on Thursday. With the final fiscal picture still holding much uncertainty, the dollar has likely held up fairly well while the swift American vaccination programme also helps the dollar to trade firm against currencies like the euro, which is having a harder time to get the vaccinations up to speed. In terms of data, today’s ADP employment numbers for January at 14:15 CET should paint a picture for Friday’s NonFarm Payrolls, while markets also turn their attention to Markit Purchasing Managers’ Index figures at 15:45 CET.

GBP

Yesterday saw limited news come out of the UK as Covid-19 developments continue to drive the pound ahead of tomorrow’s BoE meeting. The beginning of surge testing in the UK has uncovered further mutations of the B.1.1.7 coronavirus variant, the dominant strain in the UK, similar to that found in South Africa and Brazil. Public Health England officials said in a technical briefing on Tuesday that researchers had detected 11 cases of the mutation called E484K in Bristol and 32 in Liverpool, resulting in surge testing now being carried out in those areas. Today, markets will keep a close eye on the incoming case data as the spread of the mutation risks undermining the vaccines ability to reopen the UK economy, while attention will also be placed on the final reading of January’s services and composite PMIs at 09:30 GMT. While final readings tend to fall to the market’s wayside, Monday’s revision in the manufacturing PMI from 52.9 to 54.1 means attention will be given to the services print. Beyond that, it looks like it could be quite a quiet day for the pound given the magnitude of tomorrow’s Bank of England meeting. Any volatility after 10:30 CET is likely to come from broad USD moves or market participants positioning themselves for tomorrow’s monetary policy announcement.