EUR / USD
The dollar gradually lost ground ahead of the New York open with a dip in defensive demand as global equity markets rallied. The Euro advanced to highs around 1.0885, but failed to move above yesterday’s peak and struggled to generate any traction amid a lack of underlying confidence in the outlook.
There was further unease over potential divisions within the Eurogroup with reports that there are big divisions between member states on whether longer-term support should be in the form of subsidies or loans. There was, however, evidence of potential compromise between Italy and Germany accepting that crisis funding should be through the EU Commission rather than direct issuance of coronabonds.
Euro-zone consumer confidence declined sharply to -22.7 for April from -11.6 previously which was below expectations of -19.5 and very close to record lows registered in 2009 in the aftermath of the financial crisis as lockdown measures inevitably had a negative impact.
Overall confidence in the Euro remained fragile, especially with the ECB under pressure to increase bond buying in order to alleviate upward pressure on Italian bond yields. The central bank made limited changes after the US close on Wednesday with the bank loosening collateral rules to accept bonds which were investment grade.
There was also still residual US currency demand as oil remained vulnerable to selling pressure. As the dollar regained ground, the Euro retreated steadily to lows just above the 1.0800 level. The latest Euro-zone and US PMI business confidence data will be released on Thursday with expectations of further weakness, especially in the services sector, with the Euro securing a marginal recovery to the 1.0830 area amid expectations of choppy trading later in the day.
According to source reports the Bank of Japan is likely to ease monetary policy next week, although the overall market impact was limited. Risk appetite held a solid tone during the day which limited potential yen support on defensive grounds, although there was still an important element of unease surrounding trends in the energy sector. Narrow ranges prevailed with the dollar consolidating around 107.75 amid a generally firmer US currency. The US House of Representatives is set to approve the latest $500bn support package on Thursday, although it was overshadowed by further debate over a loosening of US lockdown restrictions.
There were further concerns that China’s domestic economy was recovering only slowly which will hamper the global trade outlook.
Japan’s flash manufacturing PMI index retreated slightly to 43.7 from 44.8 the previous month while the services-sector index declined to a fresh record low of 22.8 from 33.8 previously. The survey indicated that GDP was likely to decline 10% for the second quarter of 2020. Equity futures were little changed and oil prices secured a tentative recovery, but risk conditions remained fragile with the dollar little changed around 107.80 at the European open.
There was little impact from the latest inflation data with the core CPI rate at 1.6% from 1.7% previously and in line with consensus forecasts. The immediate implications for monetary policy are extremely limited, although there was some relief that there was not a steeper fall in the headline rate.
Sterling attempted to regain ground during the day with an element of bargain hunting after recent losses, especially with a net improvement in risk appetite also helping to underpin sentiment. The Euro retreated below the 0.8800 level and Sterling pushed to highs near 1.2385 against the dollar.
There were still underlying concerns surrounding the outlook with the economy contracting sharply in the short term. The latest PMI business sentiment releases are due on Thursday with a fresh record low expected for the dominant services sector. There were also concerns over the EU/UK trade talks with negotiations on-going this week and a press conference from EU chief negotiator Barnier scheduled for Friday. Sterling retreated to near 1.2300 against the dollar, although this primarily reflected a firmer dollar tone. The UK currency recovered ground on Thursday with a fresh move above 1.2350 against the US currency.
A steadier tone surrounding risk appetite helped curb defensive Swiss franc demand during Wednesday, although there was till little evidence of selling pressure, especially with further concerns over the oil sector. The Euro pushed to the 1.0540 area before retreating to 1.0520 amid wider losses while the dollar settled above the 0.9700 level. Markets will be monitoring the Eurogroup meeting closely on Thursday and any failure to make headway would tend to provide fresh support for the Swiss currency. The Euro was held little changed against the franc on Thursday with the dollar just above 0.9700.