US coronavirus developments continued to cause concern with a fresh record high in the number of new daily infections.

US coronavirus developments continued to cause concern with a fresh record high in the number of new daily infections.

The combination of firm equities, low yields and weaker fundamentals undermined the US currency with the dollar index at 4-week lows.

EUR/USD moved above 1.1350 despite a lack of developments on the EU recovery fund. Sterling was boosted by dollar weakness with GBP/USD at 3-week highs amid a muted thumbs-up for the Chancellor’s economic support package.

Commodity currencies were boosted by US dollar weakness, but AUD/USD was held below 0.7000.

The German DIHK institute forecast that exports would decline 15% in 2020 before a recovery of 7% next year. ECB vice-president de-Guindos stated that we can be more optimistic over growth and also stated that the debate surrounding ECB proportionality was now in the past. Markets overall remained more confident that the German constitutional Court ruling would not disrupt the central bank’s bond buying plans which helped underpin the Euro.

There was further debate surrounding the EU recovery fund with meetings likely to accelerate ahead of next week’s EU Summit. EU council President Michel stated that there was still a lot of work to do and that a workable solution needed to be found quickly. Any Euro vulnerability was offset by underlying dollar losses.

The dollar overall lost ground as equity markets stabilised and there was also evidence of underlying US currency selling given that the recovery in US equities was limited. Boston Fed President Rosengren stated that the recovery will remain weaker than hoped through the next few months.

Overall confidence in US fundamentals deteriorated and there was also a decline in real yields as inflation expectations increased. The lack of yield support could prove an important negative factor for the US currency and EUR/USD strengthened to the 1.1350 area at the European close. The Chinese yuan strengthened to 4-month highs which also provided a net boost to the Euro and EUR/USD traded above 1.1350 in early Europe on Thursday despite a weaker than expected recovery in German exports.

The dollar and yen overall remain trapped in narrow ranges during the day as has been the case throughout the past few sessions. The dollar overall was unable to make any significant impression and gradually lost ground amid wider losses. There were some positive US coronavirus developments as New York will allow malls to re-open from July 10th while there was a slight slowdown in the rate of new Arizona infections.

California, however, recorded a substantial increase in new infections of over 11,000 with Tennessee also posting a record number of new cases and the total US count was at a record close to 60,000 for the day. Further tensions between President Trump and state governors also reinforced a lack of confidence in the US outlook. Overall, USD/JPY retreated to the 107.25 area at the New York close.

The Congressional Budget Office reported a budget deficit of $2.7 trillion for the first nine months of fiscal 2020 with revenue sliding 28%.

Bank of Japan Governor Kuroda stated that the bank will not hesitate to add further easing if needed and the economy is in an extremely severe state. The dollar remained vulnerable and USD/JPY continued to trade around the 107.25 area with overall ranges still relatively narrow as the yen lost ground on the crosses.

Chancellor Sunak announced a £30bn support package for the economy with a new job retention scheme which will encourage employers to retain employees once the furlough scheme ends in October. There were tax cuts for housing with a temporary increase in stamp duty thresholds while there will be a temporary VAT cut for the hospitality sector. Sunak also announced a subsidy to support eating out. The overall package was slightly larger than expected, although markets had already priced in a substantial stimulus and Sterling was unable to make further headway, especially with underlying fears over budget deficit trends.

According to EU official Beltramello, the equivalence assessments for UK financial-market access to the EU is still on-going. The House of Lords, however, released further documents which suggested that the EU would grant the access to the City of London. EU Chief Negotiator Barnier stated that he had useful talks with UK counterpart Frost, but no further details were released on the content of the informal meeting with talks continuing in London this week.

Dollar weakness dominated later in the session with GBP/USD strengthening to the 1.2600 area as the US currency lost ground while GBP/EUR consolidated around 1.1130. The RICS housing index strengthened to -15 for June from -32 in May and the sector will gain a boost from the cut in Stamp Duty.

Economic Calendar

07:00German Trade Balance(MAY)5.2B3.2B
13:00German Buba President Weidmann speech--
13:30CAD Building Permits (M/M)(MAY)--17.10%
23:45NZD Electronic Card Retail Sales (Y/Y)(JUN 01)--6.00%
23:45NZD Electronic Card Retail Sales (M/M)(JUN 01)-78.90%

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