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In its latest monthly report, the German Bundesbank stated that the economy should start its recovery course during the second quarter as restrictions imposed to contain the pandemic are gradually lifted. The degree of uncertainty remained extremely high, however, and business activity will significantly undershoot the level recorded in the first quarter of the year due to heavy losses in spending and investment. The Bundesbank was optimistic over the fiscal outlook due to considerable leeway built up ahead of the crisis. Risk appetite strengthened ahead of the New York open which helped underpin the Euro. Overall dollar demand also dipped sharply with sharp losses against commodity currencies as equity markets rallied strongly.

In congressional testimony on Tuesday, Fed Chair Powell will repeat that the Fed is prepared to use the full range of its tools and will also call on Congress to provide additional support for the economy. Expectations of dovish rhetoric continued to undermine potential dollar support.

The US NAHB housing index improved to 37 for May from 30 the previous month which was above consensus forecasts of 35.0.

Euro-zone sentiment strengthened sharply late in the European session following proposals by Germany and France for a EUR500bn coronavirus reconstruction plan and that there was also agreement that the EU Commission should issue bonds to fund the programme. The Euro moved sharply higher to trade above 1.0900 as the dollar maintained a weak tone while Italian bond yields declined sharply. The Euro held just above 1.0900 on Tuesday despite concerns that the recovery fund would face major hurdles in being approved with the dollar again losing defensive demand as global risk appetite held firm.


In comments at the WHO assembly, Chinese President Xi stated that global supply chains must be kept open. Latest data from China suggested that oi demand had recovered to near levels prevailing ahead of the national lockdown which helped underpin risk appetite as well as maintaining support for crude oil.
Risk appetite was also underpinned by reports that Moderna had achieved positive data in the early stages of its coronavirus vaccine trial. Equity markets moved sharply higher, especially with Germany and Franc proposing a reconstruction package. Overall demand for the Japanese yen declined on defensive grounds and the dollar pushed to highs at 107.50 before a retreat to around 107.30 as the US currency lost wider support. Overall yen selling was still contained.

There were further concerns surrounding US-China tensions with further attacks on President Trump by China’s Global Times while Trump threatened to withdraw WHO funding permanently. Regional equities held gains and the dollar traded around 107.40 in early Europe.


Sterling sentiment remained generally negative during Monday, but there was significant relief from global factors. Risk appetite gained sharply during the day with big gains for equities and a fresh surge in oil prices. The UK currency’s underlying performance remains correlated strongly with trends in risk appetite and confidence in the global outlook. In this environment, the UK currency was able to post net gains, although underlying sentiment remained negative.

Bank of England Monetary Policy Committee member Tenreyro stated that in her personal opinion negative interest rates have had a positive impact in Europe. She also stated that there were some considerations that would be more specific to the UK and that all options are on the table and that the central bank has not ruled out any policy tool. Expectations of further action by the Bank of England continued to undermine Sterling sentiment and the currency dipped after Tenreyo’s comments, but risk appetite continued to have an important impact. Sterling recovered to highs above 1.2200 against the dollar before fading slightly while the Euro recovered from intra-day losses to trade around 0.8950. Labour-market data recorded an increase in the April claimant count of 856,500 compared with consensus expectations of around 680,000. Unemployment in the 3 months to March was held at 3.9% from 4.0% previously. Sterling traded above 1.2200 with the Euro around 0.8935 after the data.


Swiss sight deposits increased to CHF673.5bn in the latest week from CHF669.1bn previously which indicates that National Bank intervention had slowed slightly, but was still running at high levels. The franc was hampered by firmer global risk conditions during the day and volatility surged. The Euro initially advanced to highs near 1.0540 and the Swiss currency then dipped sharply late in Europe following the Franco/German move to create a recovery fund. The Euro advanced sharply to highs above 1.0620, although the dollar failed to hold 0.9750. The franc recovered slightly on Tuesday with the Euro close to 1.0600 and the dollar around 0.9725.



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