Concerns over a renewed increase in coronavirus cases stifled risk appetite on Friday with an increase in US cases and fresh outbreak in Beijing.

Concerns over a renewed increase in coronavirus cases stifled risk appetite on Friday with an increase in US cases and fresh outbreak in Beijing. US selling increased on Monday which undermined confidence as US cases increased again over the weekend as futures traded 3.0% lower.

Global equity markets moved lower with disappointing Chinese data also undermining risk sentiment. The dollar secured an element of defensive support, but unease over domestic developments limited overall support with EUR/USD retreating below 1.1250.

Sterling remained on the defensive after bleak GDP data, especially with weaker risk conditions and GBP/USD traded at 2-week lows below 1.2500.

Commodity currencies edged lower on Friday with further sharp losses on Monday in choppy trading conditions as USD/CAD moved above 1.3650.

Euro-zone industrial production declined 17.1% for April following a revised 11.9% decline for the previous month, although this was slightly better than consensus forecasts. EUR/USD held a firm tone into the New York open, but failed to advance to the 1.1350 area.

US import prices rose 1.0% for May after a 2.6% decline previously with a 6.0% annual decline. The University of Michigan consumer confidence index strengthened to 78.9 for June from 72.3 the previous month and above consensus forecasts of 75.0, the highest reading for four months, although still well below pre-covid levels.

In its latest monetary policy report, the Federal Reserve commented that weekly data from ADP indicate that re-hiring has continued and that payroll employment is likely to move up again in June. There was a similar message from the data received since the May employment report survey week. The report did, however, comment that the distinction between being unemployed and out of labour force had become especially blurred and uncertainty will persist.

According to the report, real GDP appears to be plummeting at a breath-taking pace for the second quarter, but manufacturing activity improved slightly for May while the economy is still expected to be fragile in the short term. Overall risk appetite was more fragile during US trading with the dollar securing increased support and EUR/USD retreated sharply to lows below 1.1220 before settling around 1.1250 as equities recovered in choppy trading.

CFTC data recorded a renewed increase in long non-commercial Euro positions to 96,000 contracts from 81,000 previously and highest level since May 2018, increasing the risk of significant selling if confidence retreats. EUR/USD edged lower on Monday as a firmer US dollar tone and fragile risk appetite supported the dollar.

White House Economic adviser Kudlow stated that the US is not having a second wave and he isn’t going to shut down the economy. There were still underlying reservations over US coronavirus developments as the number of new cases and hospital admissions continued to increase in several US states. Fed Governor Barkin did not see negative interest rates happening. USD/JPY hit advanced to highs in the 107.50 area before hitting resistance and the pair drifted lower into the US close.

CFTC data recorded a notable decline in long non-commercial yen positions, lessening the risk of further yen selling.

Chinese retail sales declined 2.8% in the year to May after a 7.5% decline previously, but below expectations of a 2.3% retreat while growth in industrial production was held at 4.4% and below market expectations of 5.0%. The data undermined confidence in the Chinese rebound and overall risk appetite was undermined by further US coronavirus fears and a fresh outbreak in Beijing. US and global equities moved lower and USD/JPY retreated to the 107.00 area amid yen gains before correcting.

The NIESR estimated that UK GDP declined 17.6% in the latest 3 month period with an annual contraction of 21.3% from 24.5% previously. On a monthly, basis, NIESR projected growth of 4.5% after the 20.4% contraction for April. At this stage, however, it expects a renewed June decline with a second-quarter contraction at 20-25%.

The UK formally confirmed that the UK would not seek an extension to the transition period and customs checks on goods into the UK from the EU would be delayed for six months. There will be high-level talks between Prime Minister Johnson and EU officials on Monday with reports that the UK will push for a deal by Autumn.

Bank of England Governor Bailey stated that the April GDP was close to expectations and there were some signs that the economy was now beginning to come back to life. There was still a big question over how much damage had been caused to the economy and the bank was ready to take action to mitigate the effects. The comments reinforced expectations of a further increase in bond purchases of at least £100bn at this week’s policy meeting.

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