EUR / USD
The Euro was unable to gain any support ahead of the New York open and gradually lost ground and the dollar gained an element of support as global equity markets moved lower. The ECB announced that Euro-zone banks had EUR1.3trn in the first TLTRO auction under more favourable terms which helped curb bond yields. There were comments from German officials that real negotiations on the EU recovery fund would start next week, dampening expectations of progress at this week’s Summit.
The US Philadelphia Fed manufacturing index recovered strongly to 27.5 for June from -43.1 the previous month and well above consensus forecasts of -23.0. Shipments and new orders also strengthened sharply on the month with a smaller than expected recovery in unfilled orders. There was a further decline in employment, although job losses were at a slower pace with a small increase in costs for the month. There was also a further strengthening in the 6-month outlook.
Initial jobless claims declined slightly to 1.51mn in the latest week from 1.57mn the previous week and above consensus forecasts of 1.30mn. Continuing claims were also above consensus forecasts at 20.54mn from 20.61mn the previous week.
Overall risk conditions were slightly more fragile which limited potential dollar selling and commodity currencies also drifted lower with the Euro retreating to the 1.1200 area. The Euro was only just above this level on Friday with markets monitoring the EU Summit meeting during the day.
JPY
Risk appetite was generally fragile ahead of the New York open which continuing to underpin the Japanese currency. The dollar has briefly moved back above the 107.00 level before fading once again. US equities were held in relatively narrow ranges and the dollar settled close to 106.85.
There were further concerns over US coronavirus developments with further increases in the states of Texas, Florida and Arizona. For the US as a whole, there was an increase in cases of 1.2%. Another round of tough rhetoric on China from President Trump did little to reassure markets.
The overall Fed balance sheet declined slightly in the latest week to $7.14trn from $7.22trn, the first decline since February as swaps with global central banks declined sharply. The slower overall balance sheet expansion will tend to provide some underlying dollar support.
There was evidence of increased capital outflows from Japan into US high-yield assets. The Japanese government upgraded its assessment of the economy for the first time since January 2018 and Tokyo has lifted all restrictions on businesses. Equity markets edged higher and the dollar settled little changed around 106.85.
GBP
Sterling steadily lost ground ahead of the Bank of England policy decision with underlying weak sentiment and the Euro tested the 0.9000 level. The bank held interest rates at 0.1%, in line with consensus forecasts and there was a further £100bn increase in the asset-purchases ceiling to £745bn. This was also in line with expectations, but chief economist Haldane voted against the increase. The bank also expects to slow the rate of bond purchases significantly over the remainder of 2020. The committee stated that the economic outlook was less severe than expected at the May meeting with second-quarter GDP likely to register a 20% contraction, although there was still a high degree of uncertainty over the outlook with particular concerns over the labour market. Governor Bailey stated that negative rates and yield-curve control had not been discussed and that bond-buying could slow given that financial markets were calmer. Sterling rallied initially but selling quickly resuming as markets were sceptical over the bank’s stance and selling continued with a slide to 1.2400 against the dollar while the Euro closed around 0.9020.
UK consumer confidence recovered slightly to -30 from -36 according to the preliminary June reading. Retail sales recovered strongly in May with a 12.0% increase following an 18.1% decline previously and well above consensus forecasts of 5.7% with a 13.1% annual decline. Government borrowing increased to a record £54.5bn from £47.8bn previously. Sterling was unable to extend a limited recovery, held below 1.2450 against the dollar, with the Euro just above 0.9000.
CHF
The Swiss National Bank maintained interest rates at -0.75% at the latest policy meeting, in line with consensus forecasts. The central bank reiterated that the Swiss currency was highly valued and the bank was prepared to intervene more aggressively to limit franc appreciation. Bank Chair Jordan also insisted that the bank was not engaged in currency manipulation. The overall reaction was limited given that it was in line with expectations with the Euro edging lower amid wider losses while the dollar settled just above 0.9500. The franc held steady on Friday with the dollar just above the 0.9500 level.
