Risk appetite remained cautious amid further US coronavirus unease.

Risk appetite remained cautious amid further US coronavirus unease. Comments from Fed speakers, however, maintained expectations of very supportive monetary policies.

US equities posted net gains on the Fed talk which provided wider relief to equities. Asian markets were mixed as US-China tensions limited market support.

A lack of defensive demand and weak fundamentals undermined the dollar with 1-month lows. The Euro held a firm tone with EUR/USD touching 4-month highs above 1.1400 before a limited correction. Sterling remained on the defensive after disappointing GDP data, but equity gains provided some relief with net GBP/USD gains.

The German ZEW economic sentiment index retreated slightly to 59.3 for July from 63.4 and below consensus forecasts of 60.0. There was a net improvement in the current conditions index to -80.9 from -83.1, although this was well below market expectations. There was a slightly stronger than expected increase in the Euro-zone sentiment index. Euro-zone industrial production increased 12.4% for May following April’s 28.7% slide with the year-on-year decline at 20.9% from 28.7% previously.

The Euro drifted lower following the data, although overall selling pressure was muted with EUR/USD retreating to the 1.1325 area. German Chancellor Merkel stated that agreement on the EU recovery fund is urgent, increasing pressure for a deal to be reached at this week’s Summit starting on Friday.

The US NFIB small business confidence index strengthened to 100.6 for June from 94.4 previously. Consumer prices increased 0.6% for June following a 0.1% decline previously and slightly above consensus forecasts of 0.5%. Core prices increased 0.2% on the month, in line with expectations and the annual rate held at 1.2%.

Fed Governor Brainard stated that monetary policy will have to shift from stabilisation to accommodation with downside risks predominant for the economy while the Fed needed to be attentive to the risk of lower inflation expectations. She again ruled out negative interest rates, but called for substantial asset purchases. Dallas Fed President Kaplan stating that there is a pronounced economic slowing again. There were strong expectations of a very supportive Fed monetary policy.

The dollar was unable to make any headway even when equities struggled while the Euro gained strong support in New York with a sharp EUR/USD move higher to challenge the 1.1400 area. The dollar maintained a weak tone on Wednesday, although EUR/USD retreated slightly from 4-month highs around 1.1425.

Philadelphia also announced that large-scale public events until February 2021 while New York added a further four states to its 14-day quarantine list. Overall US coronavirus concerns persisted with sharp increases in states such as Oklahoma while Texas cases also hit a record high. Although risk conditions were relatively fragile, the yen was unable to secure significant defensive support with dollar resilient and the Euro able to secure a further advance against the Japanese currency.

There were reports that President Trump would not target the Hong Kong dollar peg which helped underpin risk sentiment, although he also stated he wasn’t interested in another trade deal with China and also signed the bill which aims at imposing sanctions on companies that help restrict Hong Kong freedoms.

Japan’s monthly Tankan manufacturing index posted a slight recovery for July with a slightly stronger recovery for the non-manufacturing index, although demand remained weak. Tokyo’s coronavirus panel raised the infection alert, but the government played down the impact. The Bank of Japan made no changes to monetary policy, but will take further action as needed. Yen moves remained limited with USD/JPY around 107.25 with EUR/JPY at a 1-month high near 122.50.

Sterling continued to lose ground on Tuesday with further disappointment over the latest GDP data which suggested a slower than expected recovery. The Office of Budget Responsibility (OBR) forecast a 2020 GDP decline of 12.4% in its central forecast with the budget deficit expected to hit 16% of GDP.

A lack of confidence in medium-term fundamentals continued to undermine Sterling support. There were also some concerns that the policy reversal and decision to ban Huawei from the 5G network would have negative political and economic consequences over the medium term.

The NIESR estimated that the UK economy will post a more substantial recovery for June at 7.8% from 1.8% in May and the 3-month measure will show a sharp improvement for the July data. GBP/USD dipped to near 1.2500 before a recovery to 1.2550 as the US currency retreated while GBP/EUR posted sharp losses 1.0975 area before a limited correction to 1.1015 as gains in equities provided some Sterling relief. The UK CPI inflation rate increased to 0.6% from 0.4% and above expectations of 0.5% with the core rate at 1.4% from 1.2%. GBP/USD edged higher to 1.2580 as a weak dollar and equity market gains provided support.

Economic Calendar

07:00GBP Core CPI (Y/Y)(JUN)1.20%1.20%
07:00GBP CPI (Y/Y)(JUN)0.40%0.50%
07:00GBP CPI (M/M)(JUN)-0.20%0.00%
07:00GBP PPI Core Output (Y/Y)(JUN)0.60.6
07:00GBP PPI Output (Y/Y)(JUN)-1.10%-1.20%
07:00GBP PPI Input (M/M)(JUN)3.00%0.30%
07:00GBP PPI Input (Y/Y)(JUN)-6.50%-9.40%
10:00CPI (EU Norm) Prelim MM(JUN)-0.10%0.10%
10:00CPI (EU Norm) Prelim YY(JUN)-0.10%-0.20%
10:00CPI (EU Norm) Final MM*(JUN)-0.20%-0.40%
10:00CPI (EU Norm) Final YY*(JUN)-0.00%
13:30USD Export Price Index (M/M)(JUN)0.60.5
13:30USD Import Price Index (M/M)(JUN)0.60%1.00%
13:30NY Empire State Manufacturing Index(JUL)-29.8-0.2
13:30CAD Manufacturing Shipments (M/M)(MAY)-20.00%-28.50%
14:15USD Capacity Utilization(JUN)-64.80%
14:15USD Industrial Production(JUN)-1.40%
15:00CAD BoC Rate Decision-0.25%
23:45NZD CPI (Q/Q)0.40%0.80%
23:45NZD CPI (Y/Y)2.10%2.50%

*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.