EUR / USD
The headline Euro-zone CPI inflation rate declined to 0.1% for May from 0.3% previously which was in line with consensus expectations and the lowest rate since June 2016 while the core rate held at 0.9% and was slightly above market expectations of 0.8%. Annual M3 money supply growth strengthened to 8.3% from 7.5% previously.
The US core PCE index declined 0.4% in April compared with market expectations of 0.3% with the year-on-year declining sharply to 1.0% from 1.7% and the lowest reading for over 9 years. The sharp decline in the Fed’s preferred inflation gauge will maintain pressure for a very aggressive monetary policy. Personal spending declined 13.6% for April compared with expectations of a 12.6% decline, reinforcing fears over the second-quarter GDP outlook. The Chicago PMI index declined to 32.3 for May from 35.4 previously and the lowest reading since March 1982. There was a sharp decline in order backlogs, although employment declined at a slower pace.
Cleveland Fed President Mester stated that US economic recovery is likely to be slow and hard to imagine a V shape. Policy support is likely via forward guidance and asset-buying while yield-curve control is a discussion for a future phase. Fed Chair Powell reiterated that the central bank was broadly opposed to negative interest rates, although the comments had little overall impact. The Fed will now be in a blackout period ahead of the June 10th policy meeting.
The Euro gained an element of support from month-end positioning and an element of optimism that the EU recovery plan would help support the Euro-zone economy. It pushed to 2-month highs near 1.1150 before a correction to near 1.1100. There was a small increase in the long Euro non-commercial position, limiting the scope for further gains. The dollar remained on the defensive at 2-month lows on Monday as defensive demand remained lower and the Euro advanced to the 1.1140 area.
The dollar found support above 107.00 ahead of the New York open, but remained weak amid wider losses and nervousness over the situation surrounding US-China relations. After the European close, President Trump stated that the US Administration would start the process of eliminating special treatment for Hong Kong, but there was an immediate move to impose fresh sanctions and Trump also declared that he would not pull-out of the phase-one trade agreement.
There was an element of relief following the comments as equity markets rallied and the stronger tone in risk appetite was important pushing the dollar to around 107.80.
CFTC data recorded a small net increase in long yen positions, maintaining the potential for yen selling if risk appetite strengthens.
China’s manufacturing PMI index declined marginally to 50.6 for May from 50.8 previously, but there was a net improvement in the non-manufacturing index to 53.6 from 53.2. The Caixin PMI manufacturing index strengthened to 50.7 from 49.4 and above consensus expectations with the strongest output increase since 2011, although there were still concerns over subdued sales trends with weak external demand. Asian equity markets hit 3-month highs with the dollar just above 107.50.
Overall Sterling sentiment remained weak on Friday with further concerns over the UK recovery profile and unease over EU-Trade talks. The Euro strengthened to fresh 2-month highs above 0.9000 with a peak near 0.9050 as De Rynck who is a senior adviser to chief EU negotiator Barnier stated that there was no appetite from individual countries to revise the EU mandate. The UK currency rallied late in the European session with evidence of buying associated with month-end positioning and the Euro retreated to just below 0.9000 while Sterling settled near 1.2350 against the dollar. CFTC data recorded a small net increase in short Sterling positions, the 12th successive week of net selling to the highest level for 5 months as underlying sentiment remained negative.
Over the weekend, EU chief negotiator Barnier stated that the UK needed to more realistic over the talks and there were also reports that the UK had accused the EU of trying to prolong talks until November. The talks will resume on Tuesday with Sterling liable to be hit by choppy trading as headlines are released. The UK currency edged higher on Tuesday as global risk appetite remained robust and it traded near 2-week highs close to 1.2400 against the dollar.
The May Swiss KOF business confidence index declined to a record low of 53.2 from 59.7 previously and well below consensus forecasts of 70.0 despite the gradual economic re-opening. National Bank member Zurbruegg reiterated that the central bank had room for manoeuvre on interest rates and currency intervention.
The franc still secured renewed support with the Euro retreating to the 1.0675 area from a peak near 1.0700 while the dollar dipped to 2-month lows near 0.9600 and remained near this level on Monday while the Euro was able to regain ground with the currency traded close to 1.0700.