Sterling sentiment remained generally fragile, but month-end demand and firmer risk appetite provided support.

There was choppy trading surrounding month-end positioning on Friday. After nervousness over US-China tensions, there was some relief that President Trump’s comments did not inflame the situation.

The dollar remained generally on the defensive amid a lack of underlying demand with a retreat to fresh 2-month lows. EUR/USD posted fresh 2-month highs near 1.1150. Fed Chair Powell continued to indicate that negative interest rates were not an attractive option.

Sterling sentiment remained generally fragile, but month-end demand and firmer risk appetite provided support. Commodity currencies overall were resilient on stronger risk appetite with AUD/USD at 3-month highs as iron ore prices strengthened.

The headline Euro-zone CPI inflation rate declined to 0.1% for May from 0.3% previously which was in line with consensus expectations and the lowest rate since June 2016 while the core rate held at 0.9% and was slightly above market expectations of 0.8%. Annual M3 money supply growth strengthened to 8.3% from 7.5% previously.

The US core PCE index declined 0.4% in April compared with market expectations of 0.3% with the year-on-year declining sharply to 1.0% from 1.7% and the lowest reading for over 9 years. The sharp decline in the Fed’s preferred inflation gauge will maintain pressure for a very aggressive monetary policy. Personal spending declined 13.6% for April compared with expectations of a 12.6% decline, reinforcing fears over the second-quarter GDP outlook. The Chicago PMI index declined to 32.3 for May from 35.4 previously and the lowest reading since March 1982. There was a sharp decline in order backlogs, although employment declined at a slower pace.

Cleveland Fed President Mester stated that US economic recovery is likely to be slow and hard to imagine a V shape. Policy support is likely via forward guidance and asset buying while yield-curve control is a discussion for a future phase. Fed Chair Powell reiterated that the central bank was broadly opposed to negative interest rates, although the comments had little overall impact. The Fed will now be in a blackout period ahead of the June 10th policy meeting.

The Euro gained an element of support from month-end positioning and an element of optimism that the EU recovery plan would help support the Euro-zone economy. EUR/USD pushed to 2-month highs near 1.1150 before a correction to near 1.1100. There was a small increase in the long Euro non-commercial position, limiting scope for further gains. The dollar remained on the defensive at 2-month lows on Monday as defensive demand remained lower and EUR/USD advanced to the 1.1140 area.

USD/JPY found support above 107.00 ahead of Friday’s New York open, but remained weak amid wider losses and nervousness over the situation surrounding US-China relations. After the European close, President Trump stated that the US Administration would start the process of eliminating special treatment for Hong Kong, but there was immediate move to impose fresh sanctions and Trump also declared that he would not pull-out of the phase-one trade agreement.

There was an element of relief following the comments as equity markets rallied and the stronger tone in risk appetite was important pushing USD/JPY to around 107.80.

CFTC data recorded a small net increase in long yen positions, maintaining the potential for yen selling if risk appetite strengthens.

China’s manufacturing PMI index declined marginally to 50.6 for May from 50.8 previously, but there was a net improvement in the non-manufacturing index to 53.6 from 53.2. The Caixin PMI manufacturing index strengthened to 50.7 from 49.4 and above consensus expectations with the strongest output increase since 2011, although there were still concerns over subdued sales trends with weak external demand. Asian equity markets hit 3-month highs with USD/JPY just above 107.50.

Overall Sterling sentiment remained weak on Friday with further concerns over the UK recovery profile and unease over EU-Trade talks. GBP/EUR dipped to fresh 2-month lows below 1.1050 with a low near 1.1042 as De Rynck who is senior adviser to chief EU negotiator Barnier stated that there was no appetite from individual countries to revise the EU mandate. The UK currency rallied late in the European session with evidence of buying associated with month-end positioning and EUR/GBP retreated to just below 0.9000 while GBP/USD settled near 1.2350. CFTC data recorded a small net increase in short Sterling positions, the 12th successive week of net selling to the highest level for 5 months as underlying sentiment remained negative.

Over the weekend, EU chief negotiator Barnier stated that the UK needed to more realistic over the talks and there were also reports that the UK had accused the EU of trying to prolong talks until November. The talks will resume on Tuesday with Sterling liable to be hit by choppy trading as headlines are released. Sterling edged higher on Tuesday as global risk appetite remained robust with GBP/USD near 2-week highs around 1.2400.

Economic Calendar

08:45Markit/ADACI Mfg PMI(MAY)-31.1
09:30GBP PMI Manufacturing-40.6
14:30CAD RBC Manufacturing PMI(MAY)-33
14:45USD Manufacturing PMI(MAY)-39.8
15:00USD Construction Spending (M/M)(APR)-5.30%0.90%
15:00US Manufacturing ISM(M/M)(MAY)42.541.5
23:45NZD Building Permits (M/M)(APR)--21.30%

*All rates shown are indicative of interbank rates and should only be used for indication purposes only. It is important to note that foreign exchange rates fluctuate and that rates may vary depending on the amount and the base currency that is purchased or sold. Rates are correct as of 8:00am UK time. CentralFX are not responsible for the rates shown.