EUR / USD
The Euro continued to lose ground on Friday as underlying dollar demand increased slightly with the single currency retreating to the 1.0900 area.
According to the CFTC data, there was a small decline in overall Euro long positions, although there is still a significant position which will limit the scope for Euro gains.
Over the weekend, there was significant opposition to the Franco-German proposal for a EUR500bn recovery scheme which would be funded through grants. The Finance Ministers of Denmark, Sweden, Netherland and Sweden opposed the scheme and called for low-cost loans instead. The EU Commission will publish its own proposals on Wednesday with markets watching the overall political developments very closely.
The German IFO business confidence index strengthened to 79.5 for May from a revised 74.2 previously and above consensus forecasts. A further small decline in the current conditions component was offset by a significant recovery in the expectations component. According to the IFO, sentiment amongst German companies had recovered somewhat after a catastrophic few months. The gradual easing of lockdown measures will offer a glimmer of hope, but many companies are still pessimistic.
ECB Council member Villeroy stated that the bank would probably need to go further with further flexibility on the bond-buying programme, reinforcing expectations of increased bond buying. Narrow ranges prevailed given the US Memoria Holiday with some Euro support below 1.0900. The dollar lost ground on Tuesday amid a dip in defensive demand as commodity currencies made limited gains and the Euro recovered to the 1.0925 area as German consumer confidence recovered slightly.
Underlying concerns over US-China relations remained an important factor in currency markets, especially given the situation in Hong Kong. There were further strong protests during the weekend in response to China’s proposed new security laws and Hong Kong’s security chief called for measures to be implemented as soon as possible. There was further strong criticism from the US which maintained some vulnerability surrounding risk appetite.
It was still the case that the yen and dollar tended to move together with increased demand for both currencies when risk appetite was less robust. Equity markets were also able to make headway following Japan’s announcement that the coronavirus state of emergency would be lifted.
US equity futures moved higher on Tuesday with a fresh bout of optimism over a potential vaccine with Novavax set to begin its trial in Australia.
Bank of Japan Governor Kuroda stated that the economy remains in a severe situation with risks skewed to the downside and the central bank was ready to act without hesitation. The yen lost ground on crosses although there was still cautious over US-China trade tensions with the dollar around 107.85 as narrow ranges prevailed.
UK bond yields continued to move lower on Friday with the 5-year yields dipping into negative territory on speculation that the Bank of England would decide on negative interest rates. Sterling lost ground on Friday with the UK currency below 1.2200 against the dollar, although overall ranges were relatively narrow. Underlying sentiment remained weak following the slide in retail sales and surge in government bowing with April’s borrowing requirement close to the total for the whole of fiscal 2019/20.
CFTC data recorded that non-commercial operators increased their net short Sterling for the 11th successive week with the overall total at the highest since December 2019, illustrating underlying negative sentiment on the currency as fundamental concerns persisted.
Trade tensions were also a significant background factor with German European Minister Roth stating that time was running out for a deal by the end of 2020. There was, however, some wariness over the potential for short covering with Sterling settling just below 1.2200 against the dollar while the Euro was around 0.8935. The government announced a limited re-opening of retail shops from June 1st, but this was overshadowed by the on-going political row over Prime Minister Johnson’s chief adviser and overall Sterling sentiment remained fragile. Firm risk conditions provided an element of Sterling support on Tuesday as it traded around 1.2230.
The Swiss franc has continued to resist underlying selling pressure in currency markets, although overall ranges have been narrow. The Euro has drifted lower with a retreat back below the 1.0600 level after the brief spike to 1.0650 last week while the dollar has consolidated just above the 0.9700 level. Swiss sight deposits increased to CHF679.9bn in the latest week from CHF673.5bn previously which indicated that the National Bank had been more aggressive in intervention to restrain the Swiss currency. The franc was still only marginally weaker on Tuesday despite robust risk conditions with the dollar just above the 0.9700 level and Euro near 1.0600.