Markets remained wary over UK political risk ahead of Thursday elections for English councils.

US bond yields edged higher on Monday, but did not provide a strong lead for asset classes. Overall risk conditions were underpinned by central bank policies, although overall volatility tended to increase. Wall Street recovered from Friday’s losses to post gains, although with selling interest on rallies.

The dollar posted sharp gains on Friday amid position adjustment and posted net gains despite significant selling pressure on Monday. EUR/USD was subjected to choppy trading with support on approach to 1.2000. GBP/USD recovered from losses posted on Friday but settled below 1.3900 ahead of key UK events. A weaker US dollar underpinned commodity currency on Monday. The Canadian dollar continued to out-perform.

The dollar strengthened sharply after the New York open on Friday. Markets had been expecting that the US currency would be undermined by month-end position adjustment, but there was a sharp adjustment once the US currency started to strengthen which also triggered stop-loss Euro selling. In this environment, the US currency strengthened sharply and EUR/USD dipped to lows just above 1.2000. CFTC data recorded no significant change in Euro positioning for the latest week.

The dollar was unable to gain fresh support ahead of Monday’s European open. March German retail sales increased 7.7% with an annual increase 11.0%.

The Euro-zone manufacturing PMI index for April was revised down to 62.9 from the flash reading of 63.3. The US currency continued to lose ground ahead of the New York open with commodity currencies also recovering and EUR/USD just above 1.2050.

The US ISM manufacturing index declined to 60.7 for April from 64.7 previously and below consensus forecasts of 65.0, although it remained at historically very high levels. There was also a slowdown in the rate of new orders and production growth on the month. Employment also increased at a slower rate, but the inflation index recording the strongest reading since July 2008.

There were also widespread issues with supply-chain difficulties which curbed growth potential.

New York Fed President Williams stated that it was important not to over-react to the inflation jump as the economy improves and that the coming inflation is likely to be transitory. He added that not enough good news had been seen to change the Fed’s policy stance. Chair Powell noted the improved outlook, but also warned that there were increased inequalities and sustained damage to lower-income groups. Uncertainty over Fed policy contributed to market volatility.

EUR/USD traded above 1.2050 at the Monday New York close but the dollar was able to regain some ground on Tuesday with the pair around 1.2040.

The dollar held firm ahead of Friday’s New York open and then posted strong gains amid wider US gains with USD/JPY highs near 109.40.

CFTC data recorded a decline in short, non-commercial yen positions to 49,000 in the latest week from 60,000 previously, but the net positioning will still lead to the risk of a covering of short positions, especially if there is any setback in global risk conditions.

USD/JPY posted further gains to highs near 109.70 in Asia on Monday before a retreat as the US currency lost ground with trading volumes undermined by the Golden Week holidays in Japan. There were further losses following the US data releases as the US currency continued to register a wider decline. USD/JPY dipped below the 109.00 level, but did stabilise later in the New York session.

Japanese and Chinese markets remained closed on Tuesday which dampened activity, but USD/JPY posted net gains to 109.30 amid a wider recovery.

There were no major domestic data releases on Friday and the UK currency was little changed against the Euro with GBP/EUR just above 1.1500. There was, however, a sharp decline against the dollar with the market wrong-footed by position adjustment and Sterling dipped to lows near 1.3800.

CFTC recorded a net increase in long, non-commercial Sterling positions to a 7-week high of 29,000 contracts, limiting the scope for further buying support.

Markets remained wary over UK political risk ahead of Thursday elections for English councils and, importantly, the Scottish parliamentary elections. There were further concerns that any overall majority for the SNP would increase demand for another Scottish independence referendum.

GBP/USD found support close to 1.3800 and posted a strong recovery during the day amid wider losses while the Euro also edged lower.

The UK currency gains support as Prime Minister Johnson stated that there would be some easing of travel restrictions from May 17th. GBP/USD moved above the 1.3900 level while GBP/EUR rallied above 1.1500. Sterling was unable to extend gain on Tuesday and GBP/USD retreated back below 1.3900.

Economic Calendar

08:00SECO Consumer Climate-30
09:30GBP Consumer Credit(APR)-1.250B-1.246B
09:30GBP PMI Manufacturing(APR 01)57.960.7
09:30GBP Mortgage Approvals(APR)87.70K
13:30CAD Trade Balance(MAR)1.04B
13:30USD Trade Balance(MAR)-70.50B-71.10B
15:00USD Factory Orders(APR)-0.50%-0.80%
23:30AiG Construction Index(MAR)61.8
23:45NZD Unemployment Rate5.60%4.90%

*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.