EUR / USD
The Euro-zone current account surplus amounted to EUR27bn for March from EUR38bn the previous month while the 12-month surplus amounted to EUR338bn and 2.8% of GDP. The strong current account position will continue to provide significant underlying Euro support.
The Euro-zone flash consumer confidence reading for May recovered to -18.8 from a revised -22.0 previously and was above consensus forecasts.
Overall global risk appetite held firm during Wednesday which was important in curbing defensive dollar demand. The US currency registered further sharp losses against commodity currencies which also helped underpin the Euro. The single currency did, however, hit notable resistance close to the key 1.1000 area. The dollar also pared losses and the Euro retreated into the European close.
Minutes from April’s Federal Reserve meeting reiterated that it was committed to using all available tools to support the economy. There were still important downside risks to the economy and inflation over the medium term. There was no support for negative interest rates with the committee considering how to strengthen forward guidance. There was a limited overall market reaction with the dollar slightly stronger given further opposition to negative rates.
The latest PMI business confidence readings for both sides of the Atlantic will be released on Thursday with markets looking at the data to assess a potential recovery path out of deep recession. The dollar regained some ground on Thursday as an element of defensive demand returned with the Euro around 1.0960.
The US Federal Funds rate moved out of negative territory across the curve which should provide an element of dollar support. Dallas Fed President Kaplan stated that his guess was that the Fed will need to more to support the economy. There was further uncertainty over US fiscal policy.
Overall risk appetite remained strong during Wednesday with further gains for global equities amid hopes for economic recovery. In this context, there was reduced demand for the Japanese yen on defensive grounds, although the US dollar also lost ground during the day as demand faded. With wider US losses, the dollar retreated towards the 107.40 area before stabilisation just above 107.50 while the yen lost ground on the main crosses.
Risk appetite was more fragile on Thursday following further US-China tensions with the US Administration accusing China of malign activities while President Trump launched a barrage of negative tweets against China in an attempt to underpin his ratings. Japan’s PMI manufacturing index declined to 38.4 from 41.9 previously as production declined sharply while the services-sector index recovered slightly to 25.3 from the record low of 21.5 previously. Japan’s exports declined 21.9% in the year to April, the sharpest decline since 2009. Both the dollar and yen regained some ground with the US currency around 107.70.
Following the UK inflation data and the headline rate declining to the lowest rate since August 2016 at 0.8%, there was further speculation that the Bank of England would decide to cut interest rates into negative territory, especially with inflation expected to decline further in the short term.
The latest UK government 3-year bond auction also recorded a negative yield for the first time on record. In testimony to the Treasury Select Committee Governor Bailey stated that the bank does not rule out any instrument in principle. He made no direct reference to the possibility of increasing the scope of bond-buying to more risky assets. As far as negative interest rates are concerned, Bailey stated that a move was not ruled in or out and the evidence would have to be considered closely. He did, however, stated that his position had shifted a bit which triggered fresh speculation. The Euro advancing to around 0.8970 and Sterling below 1.2300 against the dollar.
Sterling was supported by firm global risk appetite but under-performed on most crosses. The UK business confidence data will be watched closely on Thursday and sentiment remained fragile with the Euro at fresh 7-week highs near 0.8980 while the UK currency dipped to the 1.2200 area as risk conditions turned more cautious.
The Swiss currency was able to resist further selling pressure on Wednesday despite the firm tone in global risk appetite. The Euro drifted lower even with a firm tone for the single currency. The dollar also registered sharp losses to the 0.9650 area.
There was still an element of longer-term franc demand in the context of expectations that the Swiss currency would remain a hard currency over the longer term. Global risk appetite was more vulnerable on Thursday which provided renewed franc support with the Euro near 1.0585 and the dollar around 0.9660.