EUR / USD
The Euro-zone PMI services-sector index was revised significantly higher to 48.3 in the final June reading from the flash reading of 47.3 and May’s reading of 29.0 which suggests that conditions continued to improve late in the month. The two-month gain was by far the strongest in the survey’s history. The reading for all countries was at a 4-month high as confidence continued to recover, but there was still a further decline in new business. The French index returned to expansion territory for the month.
In comments on Friday, ECB council member Knot stated that the balance of risks in the economy has become more favourable with recent data solidifying confidence in the bank’s baseline economic scenario. Overall confidence in the Euro-zone recovery remained intact.
German Chancellor Merkel stated that negotiations on the EU recovery fund are ‘rocky’ and that time is pressing to reach a deal. The next EU Summit is due on July 17-18th and leaders will attempt to reach a compromise, although Dutch Prime Minister Rutte commented that there was no need to reach an agreement at this meeting.
There were also reports of a developing split within the ECB over the amount of flexibility within the PEPP bond-buying programme and the weighting of support towards weaker countries such as Italy. The Euro was unable to gain any significant traction as narrow ranges prevailed but edged higher to the 1.1240 area at the market close. ECB council member Villeroy stated that the exceptional policy response will be long-lasting. Latest CFTC data will be released on Monday given that the US Independence Day holiday delayed the normal Friday release schedule. German factory orders increased 10.4% for May, below consensus forecasts of 15.0%. The dollar, however, lost ground on Monday amid expectations of a recovery in the global economy and the Euro strengthened to the 1.1290 area.
JPY
The dollar and yen were again confined to narrow ranges on Friday with trading volumes sapped by the US market holiday. US equity futures lost ground which also hampered the dollar and it was held around 107.50 as markets also fretted over the increase in US coronavirus cases.
Coronavirus concerns remained a significant factor with reports that the border between Australian states of New South Wales and Victoria would be closed.
US developments remained the principal focus with further increases in new cases, especially in Florida which reported over 10,000 new cases on Sunday. The overall number of new US cases slowed on Sunday, although this is likely to have been related to reporting delays during the holiday period.
US equity futures, however, posted strong gains on Monday and Asian equity markets also posted strong gains which underpinned risk appetite. In this environment, the yen lost potential defensive support and the dollar edged higher to near 107.70 area while the Euro strengthened to around 121.50 against the Japanese currency.
GBP
The final UK PMI services-sector index was unchanged from the flash reading of 47.1 from 29.0 the previous month. The data reinforced a recovery in the services sector, but there will be some concern that there was no evidence of further momentum towards the end of the month.
Prime Minister Johnson stated that he was more optimistic than EU Chief Negotiator Barnier over the prospects of a trade deal, but here will be other options if a deal cannot be reached. Sterling overall was held in narrow ranges with the Euro hitting selling interest close to 0.9030 and eventually retreating to around 0.9010 while the UK currency settled around 1.2480 against the dollar. Markets will be on alert for briefings and leaks ahead of Chancellor Sunak’s economic statement on Wednesday with reports that there would be a VAT cut for the hospitality sector and a substantial increase in the threshold for paying tax on house purchases.
The debate surrounding negative interest rates won’t go away with media reports that the Bank of England was preparing the City to make necessary changes to make operational changes, although there were also warnings that it would take up to a year to make necessary changes. Sterling edged higher to test 1.2500 against a weaker dollar while the Euro strengthened to the 0.9030 area as the firm tone in global risk appetite provided only limited support.
CHF
The Euro found an element of support near 1.0620 against the Euro on Friday and edged higher to the 1.0635 area, although overall ranges were limited amid lacklustre activity. The dollar was held just above the 0.9750 area and retreated to 0.9430 on Monday amid wider losses.
Markets will continue to monitor developments surrounding the EU recovery fund with the Euro vulnerable to some selling if there is further political resistance to the Franco/German proposals. Markets will also monitor the latest data on sight deposits to assess whether the National Bank had been intervening to curb gains.
