EUR / USD
The Euro held a firm tone in early Europe on Monday and briefly moved above the 1.0850 level but failed to hold the gains as the dollar recovered slightly from its worst levels. There were also still important reservations over the Euro-zone outlook which curbed further single-currency buying support.
Nevertheless, defensive dollar demand was broadly weaker amid hopes that countries were moving towards an easing of coronavirus restrictions.
The US Dallas Fed manufacturing index declined further to -73.7 for April from -70.0 the previous month as activity in the energy sector inevitably remained depressed.
There were, however, no major data releases during the day and there was also an important element of caution ahead of key events this week. The first-quarter US GDP data is due on Wednesday, together with the latest Federal Reserve meeting while the ECB will hold its regular policy meeting on Thursday. Overall ranges were relatively narrow during the day as volatility faded in currency markets despite further sharp moves in oil prices.
The Euro retreated to the 1.0820 area against the dollar towards the European close. The latest Italian data recorded an increase in coronavirus infections of fewer than 1,750 for Monday and the lowest reading for 7 weeks which maintained the overall flow of more positive coronavirus developments from the Euro-zone area.
The Federal Reserve provided additional monetary policy support with an expansion of the Municipal Liquidity Facility. The dollar, however, held firm on Tuesday as oil prices came under renewed selling pressure and the Euro was held around 1.0820 in early Europe as ranges remained limited.
The Japanese yen remained resilient during Monday despite the Bank of Japan move to expand bond purchases. The yen also resisted selling pressure even with gains in global equity markets as underlying selling pressure on the currency remained limited amid weak capital outflows.
There were underlying concerns that capital outflows from Japan would remain weak over the medium term, especially with overseas yields at extremely low levels. The dollar remained on the defensive and tested the 107.00 level before securing a tentative recovery to the 107.30 area. There was further pressure for the US to introduce further stimulus measures with a White House official statement that there would not be a ‘V’ shaped recovery without further support.
The Bank of Japan increased bond purchases in its latest money-market operations which weakened the yen marginally. Overall risk appetite was weaker during the Asian session with a renewed increase in US-China tensions a negative factor as the Global Times reacted aggressively to President Trump’s comments that China would be held accountable for the coronavirus outbreak. Narrow ranges prevailed with the dollar held close to 107.30 as the yen maintained an underlying firm tone.
As Prime Minister Johnson returned to work, he adopted an optimistic tone with comments that progress was being made and there were signs that the UK is passing the virus peak, although he also warned that now was the time of maximum danger and that the UK could not ease lockdown restrictions at this stage.
There were further underlying concerns that the UK would lag behind the rest of Europe in easing lockdown restrictions which would potentially increase economic damage in relative terms. The Chancellor announced strong support for small companies with loans 100% guaranteed by the government.
Sterling maintained a robust tone into the New York open, but was unable to break above 1.2450 against the dollar and gradually faded in US trading.
There was an element of uncertainty over potential month-end currency flows given that the normal pattern of Sterling commercial flows has been disrupted by the economic downturn and the absence of overseas tourism. It is possible that the currency will be more resilient than usual. Risk appetite was more fragile on Tuesday which limited potential Sterling support, although ranges were narrow with the UK currency holding just above 1.2400 and the Euro around 0.8715.
The latest National Bank weekly data recorded an increase in sight deposits to CHF650.7bn from CHF637.2bn the previous week, the largest weekly increase since January 2015 when the central bank abandoned the Euro peg. The data indicates that there is still substantial upward pressure on the Swiss currency and that the bank intervened more aggressively to curb gains. The franc lost support after the data and losses accelerated later in the session with the Euro strengthening to 2-week highs near 1.0580 while the dollar recovered to the 0.9760 area. The franc edged stronger on Tuesday given a more fragile risk tone with the Euro around 1.0560 and the dollar was little changed in the 0.9760 area as underlying selling pressure on the franc remained limited.