EUR / USD
Ahead of Tuesday’s New York open, there were reports that the ECB has drafted contingency plans to continue its bond-buying programme without the Bundesbank if necessary, although sources indicated that they also thought an outright ban would be unthinkable and Euro sentiment held steady.
The dollar remained firmly on the defensive ahead of the New York open with a fresh surge in risk appetite undermining defensive demand for the US currency. In this environment, the Euro pushed above 1.0950 as commodity currencies secured strong gains.
The US Chicago Fed National Activity index plunged to -16.7 for April from -5.0 for March, a record low for the index by a substantial margin. The Philly Fed non-manufacturing index recovered to -41.4 for May from the extreme reading of -82.5 for April, although this was still the second-lowest reading on record. New orders declined at a slower pace while companies were notably more optimistic over the outlook.
US consumer confidence recovered slightly to 86.6 for May from 85.7 in April, although this was slightly below consensus forecasts. There was a further slide in the current conditions index offset by a recovery in expectations. New home sales data was much stronger than expected at 623,000 from 619,000 previously.
The dollar overall remained on the defensive as risk appetite held firm and the Euro pushed to highs just below the 1.1000 level. The US currency was able to stage a limited recovery on Wednesday amid Chinese tensions with the Euro just above 1.0950. Markets will monitor EU Commission recovery-fund plans later on Wednesday with the Euro vulnerable if there is evidence of further divisions on fiscal policy while a unified stance and positive rhetoric would underpin single-currency sentiment.
The dollar and yen both lost ground ahead of Tuesday’s New York open with strength in risk appetite undermining demand for both currencies. The US currency still recorded slight net losses and edged lower to just below 107.50 later in US trading as equities retreated from their best levels. There was increased speculation that the Federal Reserve would adopt a yield-control policy later this year to keep bond yields down rather than having a commitment to a specific amount of purchases.
Media reports suggested that Japan’s new fiscal support package would amount to JPY117trn. There were fresh concerns over US-China tensions during Wednesday’s Asian session following reports that China was planning to expand the scope of security legislation. The US Administration has stated that there will be an announcement on potential sanctions later this week. The Chinese yuan weakened and risk conditions were more fragile, although equity futures traded in positive territory and the dollar was held close to 107.50 as the Japanese yen gained fresh support on the major crosses.
The UK CBI retail sales index recovered slightly to -50 for May from -55 the previous month with most of the improvement due to increased demand within the grocery sector. Import penetration declined sharply on the month while pricing pressures remained weak and investment plans were scaled back.
In comments on Tuesday, Bank of England chief economist Haldane commented that negative interest rates were a policy option under review with an assessment of the potential impact on the financial sector and policy effectiveness. He reiterated, however, that the bank was not remotely close to a decision. He also stated that some recent data had been slightly better than the bank’s central scenario, but that the recovery would be slow with pre-covid output levels not expected to be seen until the end of 2021. Markets were less confident that negative interest rates would be implemented which supported Sterling sentiment to some extent.
There were also reports that the EU was prepared to make concessions on fishing within the UK/EU trade talks which underpinned sentiment. The UK currency gained support from the general improvement in risk appetite and a weaker US currency. There was a peak above 1.2350 against the dollar before a limited correction while the Euro dipped below 0.8900 before selling eased. The UK currency was little changed on Wednesday with a slight retreat to 1.2320 as the dollar regained some ground.
The Swiss franc edged lower on Tuesday as risk appetite improved and global equity markets made net gains. The Euro moved above the 1.0600 level, although it failed to hold its best levels. The US currency posted significant losses to the 0.9650 area. Markets will continue to monitor Euro-zone political developments closely in the short term with a dip in defensive franc demand if there is a breakthrough on proposals for the EU recovery fund. The Swiss franc edged stronger on Wednesday amid fears over US-China tensions with the Euro back below the 1.0600 level while the dollar secured only a marginal recovery.