EUR / USD
Following overnight agreement to approve the EU Recovery fund, overall Euro sentiment remained stronger during Tuesday. From a longer-term perspective, there were expectations of strong capital inflows, especially with a reduction in risk premiums on Euro assets and reservations over the US outlook.
Italian bond yields declined to the lowest level since early 2020 which also helped underpin sentiment and there were expectations of short-term fund inflows on momentum grounds if the currency moved above the important 1.1500 level against the US currency.
There were no major US data releases during the day and Federal Reserve officials remained silent ahead of next week’s policy meeting.
The Chicago Fed national activity index increased to 4.1 for June from 3.5 the previous month with strong contributions from production and employment, although there was a small negative contribution from the orders and sales index.
The Euro was initially unable to make headway with pressure for a correction and profit-taking having a significant impact. The single currency, however, gained fresh support in New York and the dollar was also exposed to notable selling pressure as defensive demand continued to wane and concerns over US fundamentals increased. In particular, there were concerns over the US twin deficits and risk of a fresh slowdown while Euro sentiment remained stronger.
The dollar was also undermined by fresh demand for commodity currencies and the Euro broke above the 1.1500 level for the first time since January 2019. Overall, the Euro strengthened to highs near 1.1550 before correcting slightly while the US dollar remained firmly on the defensive.
Overall risk appetite held firm on Tuesday with global sentiment boosted by the EU recovery fund. The dollar initially held firm with limited yen demand, but with limited gains. The US currency dipped below 107.00 in US trading amid wider losses and the Japanese currency also secured an element of protection from a further sharp advance in precious metals. The yen was seen as a better potential store of longer-term value than the US currency and US yields drifted lower.
The US registered a daily death toll of just over 1,000 for Tuesday, the highest figure since early June with the number of new cases at above 68,000. Markets continued to monitor fiscal-policy developments with the current unemployment insurance support package due to expire at the end of July. The decision to push Shelton’s nomination as Fed Governor to a full Senate vote also had some impact in undermining the dollar. Japan’s flash manufacturing PMI index recovered slightly to 42.6 from 40.1 previously. Asian equity markets were mixed with a slightly more cautious tone and the fragile dollar traded around 106.85 and near to 4-week lows.
Global risk conditions continued to have an important positive impact on Sterling during Tuesday as international influences dominated the UK currency moves
There were still important reservations over the trade outlook with fears that there would be no short-term progress.
The EU has been focussed on securing agreement for the recovery fund and there will still be very little political energy from the EU side in the short term.
Sterling was still able to make firm gains with a break above the 1.2670 area against the dollar contributing to fresh buying interest. As the US currency came under wider selling pressure, the UK currency broke above the 1.2700 level. The Euro also dipped to test the 0.9000 level before finding support.
Underlying fundamental reservations over UK fundamentals continued with a particular focus on trade. There were reports that the UK government had abandoned hopes of reaching a trade deal with the US before November’s presidential election and there were also reports that EU talks were close to collapse.
The UK currency was unable to make further headway against the dollar to trade around 1.2720 and the Euro strengthened to near 0.9070 before correcting slightly.
The Euro was unable to make significant headway against the Swiss franc on Tuesday and settled around 1.0740 despite the single currency advance against the US dollar. Sharp gains in gold and silver provided an element of support for the Swiss currency during the day given fears over longer-term stability over fiat currencies. In this context, the Swiss franc continued to be seen as a long-term store of value.
The dollar came under renewed selling pressure with lows near 0.9320. The Euro edged higher to 1.0750 on Wednesday with the dollar at 4-month lows just below 0.9320 before a marginal recovery. The franc is likely to maintain a firm underlying tone if precious metals continue to advance.