EUR / USD
The headline German ZEW economic sentiment index strengthened to 51.0 for May from 28.2 in April which was well above consensus forecasts of 30.0 and the strongest reading since April 2015. The Euro-zone index also recovered strongly to 46.0 from 25.2. The German current conditions index, however, declined further to near a record low of -93.5 from -91.5 the previous month, illustrating the sharp divergence between current conditions and expectations.
Germany’s IFW Kiel institute warned that the economy was likely to contract more than 7% in 2020. ECB Chief Economist Lane stated that Euro-zone GDP could decline 12% in 2020 under an extreme scenario, maintaining pressure for support measures and a further easing of lockdown restrictions.
EU Commission Executive Vice President Dombrovskis stated that a recovery plan will be presented next week totalling over EUR1trn with a mixture of loans and grants. The aggressive pledge maintained underlying confidence in the Euro. ECB President Lagarde stated that proposals were ambitious, targeted and welcome.
US April housing starts declined to an annualised rate of 0.89mn from 1.28mn previously, the sharpest decline on record while building permits dipped to 1.07mn.
Fed Chair Powell continued to push for additional fiscal stimulus in order to lessen the risks of prolonged unemployment and Boston Fed President Rosengren also pushed for increased congressional fiscal support. The dollar continued to lose ground in European trading with a further dip in defensive demand as commodity currencies posted a fresh advance. The Euro hit highs around 1.0975 before fading later in the day. The dollar also regained some ground as risk appetite dipped late in the US session, but there was the fresh US selling on Wednesday as the dip in risk assets was seen as a buying opportunity and the Euro settled just below 1.0950.
Early in the European session on Tuesday, the Bank of Japan announced that it would hold an unscheduled policy meeting on May 22nd. There were expectations that the bank would announce new measures to provide funds for financial institutions, although there was speculation of further measures. The yen lost ground following the announcement with the Japanese currency also hampered by firm risk appetite, but with dollar selling above 108.00.
There were further concerns over simmering tensions with China which maintained underlying caution. Late in US trading, there was also a more pessimistic assessment of Moderna’s coronavirus drugs trail which pushed US equities lower and the dollar retreated to the 107.70 area.
The monthly Japanese Tankan manufacturing confidence index declined to -44 for May from -30 previously and the weakest reading since June 2009 while the non-manufacturing index retreated further to -36 from -23 and overall expectations remained weak. The yen was unable to gain sustained support as US equity futures recovered ground and the dollar consolidated around 107.75 as underlying defensive yen demand remained weaker.
Reaction to the UK labour-market data was relatively muted given expectations that the main spike in unemployment will be seen next month. In testimony to the House of Commons Chancellor Sunak confirmed that the unemployment rate was forecast to increase to over 10% in the short term.
Overall risk appetite held firm on Tuesday which provided underlying Sterling support, although it again tended to underperform relative to other high-beta currencies such as the Australian dollar. Underlying sentiment remained fragile given the difficulties in exiting lockdown measures. Concerns over the EU/UK trade talks also remained a negative factor. Overall, the UK currency secured net gains against the dollar, but there was selling interest on approach to 1.2300 and it retreated to near 1.2250 while the Euro retreated to the 0.8915 area. A recovery in risk provided protection on Wednesday.
The headline UK CPI inflation rate declined to 0.8% for April from 1.5% previously and below consensus forecasts of 0.9% as energy prices declined sharply while the core rate declined to 1.4% from 1.6%. The data will maintain expectations of further Bank of England easing, but Sterling was little changed around 1.2260.
The Euro was able to secure net gains on Tuesday with an advance to highs just above 1.0650 against the Swiss currency. Overall defensive franc demand remained slightly lower on the day with a solid tone surrounding global risk and increased confidence in the Euro-zone following EU proposals for a rescue fund. The dollar was little changed around 0.9720 at the European close. The franc edged higher as equities moved lower late in US trading, but the Euro held above the 1.0600 level amid expectations of further National Bank intervention while the dollar was unable to secure further support and traded around 0.9700.