EUR / USD
The headline Eurozone inflation rate increased to 0.3% for June from 0.1% previously and above consensus forecasts of 0.1%. The core rate edged lower to 0.8% from 0.9% which was in line with market expectations and markets maintained expectations of a very accommodative ECB monetary policy.
The Euro continued to lose ground into the New York open and dipped to test support below the 1.1200 level as the dollar secured wider market support.
The Chicago PMI index recovered slightly to 36.6 for June from 32.3 the previous month, although this was below expectations of 45.0 and the second-quarter figure dipped to the lowest level since 2009. Consumer confidence strengthened sharply to 98.1 for June from 85.9 in May and above consensus forecasts of 91.6. There was a strong increase in the present conditions index and a more moderate increase for the expectations index as the economic re-opening underpinned sentiment. There will be some doubts whether the boost in confidence will be sustained given the recent increase in coronavirus cases.
The EU announced new travel rules and confirmed the rumours that the ban will continue on US residents. The move helped support the Euro, although there was a greater impact from month-end positioning and a wider US dollar retreat as underlying risk appetite improved and commodity currencies secured net gains. The Euro moved to highs above 1.1250, but failed to hold its best levels and retreated to around 1.1225 on Wednesday with strong German retail sales data having little impact.
The dollar held a firm tone ahead of the Wall Street open but was unable to challenge the 108.00 area. China’s central bank announced that it will cut the re-discount rate from July 1st which will cut funding costs for smaller companies. New York equities moved higher which curbed yen demand to some extent with the dollar finding support just above 107.50 despite wider losses against European currencies.
According to media reports, there was no consensus on whether to cap yields on short-term Treasuries. There were further concerns over US coronavirus trends with a total increase in new cases of over 46,000 for Tuesday and a further increase in Texas hospitalisations.
Japan’s quarterly Tankan manufacturing index declined sharply to -34 from -8 previously and below consensus forecasts of -31 while the non-manufacturing index declined to -17 from 8. In contrast, the Chinese Caixin PMI manufacturing index, however, edged higher to 51.2 from 50.7. Overall risk appetite remained tentative given US virus data and US tensions with China over Hong Kong. After a move above the 108.00 level, the dollar dipped to near 107.60 as caution prevailed.
Sterling remained under pressure in early Europe on Tuesday as underlying sentiment remained negative. The wider than expected current account deficit for the first quarter of 2020 reinforced fears over the medium-term financing issues and underlying currency vulnerability.
Prime Minister Johnson announced a £5.0bn boost for infrastructure spending, although the overall impact was limited with the measures seen as broadly underwhelming in the context of wider stresses within the economy. Sterling remained under pressure below 1.2300 against the dollar with the Euro around 0.9140.
Bank of England chief economist Haldane stated that in, his view, risks to the economy are more evenly balanced than in May, but remain skewed to the downside. Potential positive news on demand has been more than offset by downside risks to employment and he stands ready to adjust monetary policy at speed if needed.
Fellow member Cunliffe stated that it would be wrong to draw dogmatic lines on negative interest rates while the impact on financial structures was a particularly acute issue. Overall, there were expectations that the central bank would sanction additional quantitative easing while the negative rates issue remained open.
Sterling recovered strongly into the European close with position adjustment important as the UK currency moved to a peak near 1.2400 against the dollar and the Euro retreated below 0.9100 to near 0.9060. The gains faded on Wednesday as underlying sentiment remained negative with trade unease also a feature.
The Swiss KOF leading economic index recovered to 59.4 for June from 49.6 previously, although this was below expectations of 75.0 and the second-lowest figure on record, maintaining doubts over the recovery pace. The franc overall still gained significant support during the day with the Euro retreating sharply to lows near 1.0630.
The dollar also failed to hold above 0.9500 and markets remained uneasy over underlying global risk conditions with little enthusiasm for the selling the franc. The Swiss currency held a firm tone on Wednesday, especially with gold securing further gains to 7-year highs and the franc held a firm tone in early Europe.