Risk appetite held firm on Monday amid hopes that countries were making progress towards easing lockdown measures.

Risk appetite held firm on Monday amid hopes that countries were making progress towards easing lockdown measures.

Relatively narrow ranges dominated in currency markets with all majors struggling for sustained support. The dollar resisted further selling pressure. The Euro was unable to make further headway as the US currency recovered slightly and EUR/USD settled just above 1.0800.

Sterling failed to hold its best levels and there were fears that lockdown easing would be delayed but was broadly resilient. The Australian dollar made net gains despite fading from its best levels.

EUR/USD briefly moved above the 1.0850 level but failed to hold the gains as the dollar recovered slightly from its worst levels. There were also still important reservations over the Euro-zone outlook which curbed further single-currency buying support.

Nevertheless, defensive dollar demand was broadly weaker amid hopes that countries were moving towards an easing of coronavirus restrictions.

The US Dallas Fed manufacturing index declined further to -73.7 for April from -70.0 the previous month as activity in the energy sector inevitably remained depressed.

There were, however, no major data releases during the day and there was also an important element of caution ahead of key events this week. The first-quarter US GDP data is due on Wednesday, together with the latest Federal Reserve meeting while the ECB will hold its regular policy meeting on Thursday. Overall ranges were relatively narrow during the day as volatility faded in currency markets despite further sharp moves in oil prices.

EUR/USD retreated to the 1.0820 area towards the European close. The latest Italian data recorded an increase in coronavirus infections of fewer than 1,750 for Monday and the lowest reading for 7 weeks which maintained the overall flow of more positive coronavirus developments from the Euro-zone area.

The Federal Reserve provided additional monetary policy support with an expansion of the Municipal Liquidity Facility. The dollar, however, held firm on Tuesday as oil prices came under renewed selling pressure and EUR/USD was held around 1.0820 in early Europe as ranges remained limited.

The Japanese yen remained resilient during Monday despite the Bank of Japan move to expand bond purchases. The yen also resisted selling pressure even with gains in global equity markets as underlying selling pressure on the currency remained limited amid weak capital outflows.

There were underlying concerns that capital outflows from Japan would remain weak over the medium term, especially with overseas yields at extremely low levels. USD/JPY remained on the defensive and tested the 107.00 level before securing a tentative recovery to the 107.30 area. There was further pressure for the US to introduce further stimulus measures with a White House official stating that there would not be a ‘V’ shaped recovery without further support.

The Bank of Japan increased bond purchases in its latest money-market operations which weakened the yen marginally. Overall risk appetite was weaker during the Asian session with a renewed increase in US-China tensions a negative factor as the Global Times reacted aggressively to President Trump’s comments that China would be held accountable for the coronavirus outbreak. Narrow ranges prevailed with USD/JPY held close to 107.30 as the yen maintained a firm underlying tone.

As Prime Minister Johnson returned to work, he adopted an optimistic tone with comments that progress was being made and there were signs that the UK is passing the virus peak, although he also warned that now was the time of maximum danger and that the UK could not ease lockdown restrictions at this stage.

There were further underlying concerns that the UK would lag the rest of Europe in easing lockdown restrictions which would potentially increase economic damage in relative terms. The Chancellor announced strong support for small companies with loans 100% guaranteed by the government.

Sterling maintained a robust tone into the New York open, but GBP/USD was unable to break above 1.2450 and gradually faded in US trading.

There was an element of uncertainty over potential month-end currency flows given that the normal pattern of Sterling commercial flows has been disrupted by the economic downturn and the absence of overseas tourism. It is possible that the currency will be more resilient than usual. Risk appetite was more fragile on Tuesday which limited potential Sterling support.

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