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The Euro-zone Sentix investor confidence index strengthened to 21.0 for May from 13.1 previously. This was well above consensus forecasts of 21.0 and the highest reading since March 2018 as investors took an optimistic stance towards the recovery outlook. The data maintained underlying confidence in the Euro, although dollar trends tended to dominate. US currency sentiment remained notably weaker following Fridays jobs data with the Euro at 10-week highs above 1.2150.

There were stronger market expectations that the Federal Reserve would maintain very low interest rates for even longer in an attempt to foster maximum employment

Chicago Fed President Evans stated that last week’s jobs numbers were definitely surprising, but expects that it will be a one-off. He noted that he would not be concerned with a 2.5% inflation rate if it is consistent with a 2.0% rate over time. He added that attention would need to be paid to wages and whether this would lead to sustainable inflation over the medium term. In this context, Evans stated that he did not expect that it would with an easing of pressures once bottlenecks are worked out. Dallas Fed President Kaplan stated that he still expected strong jobs growth this year and continued to push for a tapering of bond purchases next year while San Francisco head Daly reiterated that it was not yet time to talk about a tapering of bond purchases.

Late in the European session, the dollar gained some protection from weaker risk appetite with a tentative recovery from fresh 10-week lows. The US currency was still struggling to gain sustained support, especially with very negative real interest rates and the Euro edged lower to around 1.2135 on Tuesday.




The dollar and yen were both broadly out of favour during the day which limited the potential for major moves with the dollar held in narrow ranges.

Markets continued to monitor underlying inflation trends within the economy with the latest inflation release due on Wednesday. There were further concerns over upward pressure on wage rates after the 0.7% increase in hourly earnings for April. The latest New York inflation survey recorded an increase in 1-year expectations to an 8-year high of 3.4% from 3.2%. There was also a further jump in inflation expectations with the breakeven rates for US inflation-protected Treasuries (TIPS) increasing to above 2.7%, the highest reading since April 2011. Markets will monitor the bond auctions this week with markets fretting over underlying inflation risks

Inflation concerns were an important element triggering sharp selling on Wall Street equities. Chinese producer prices increased 6.8% over the year, the highest rate for over 3 years, reinforcing inflation concerns. Equity futures retreated further in Asia, although the yen and dollar remained vulnerable with USD/JPY around 108.85.



Halifax reported that house prices increased 1.4% for April after a 1.1% increase previously with the annual increase strengthening to 8.2% from 6.5% previously and the strongest reading since August 2016, reinforcing evidence of strength in the housing sector.

The government confirmed that the UK coronavirus alert level had been reduced to 3 from 4 previously due to reduced transmission and it also confirmed that the further easing of restrictions would take place next week in England. In particular, there will be a re-opening of indoor hospitality which should underpin business and consumer confidence. In this context, there was further optimism that the UK economy would stage a strong short-term recovery.

Although the SNP won a further term in the Scottish election, there were expectations that the short-term risk of a second referendum remained low amid a pandemic focus. Sterling moved sharply higher to 10-week highs near 1.4150 against the dollar while the Euro slumped to 5-week lows below the 0.8600 level.

The latest Barclays data recorded an overall increase in household spending of 0.4% in the year to April despite the slump in travel spending. The Pound was hampered to some extent by weaker global risk conditions with a retreat to near 1.4120 against the US dollar with the Euro close to 0.8600.



Swiss sight deposits increased to CHF705bn in the latest week from CHF701.4bn previously which suggested that the National Bank had been intervening again to curb franc gains. Precious metals posted further gains on Monday as US dollar confidence remained weak. The franc gained underlying support, especially given longer-term concerns over higher inflation and currency debasement.

Risk appetite was also less confident after the Wall Street open and the Euro edged lower to 1.0935 after failing to challenge the 1.1000 area. The dollar also dipped to 10-week lows just below 0.9000. The franc held a firm tone on Tuesday with the dollar trapped close to 0.9000.



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