Sterling sentiment remained negative with 7-week lows for the currency amid UK/EU trade tensions.

Risk appetite strengthened sharply during Monday with increased optimism over the global outlook and hopes for positive moves towards a coronavirus vaccine.

The dollar moved lower amid the more positive risk tone and dip in defensive demand. The trends were enhanced after Franc and Germany proposed a EUR500bn EU recovery fund with the EU Commission issuing bonds and EUR/USD moved above 1.0900.

GBP/USD recovered on US dollar losses and labour-market data was mixed, but overall Sterling sentiment remained weak.

Commodity currencies posted sharp gains with AUD/USD above 0.6500 and USD/CAD below 1.4000. The Swiss franc weakened sharply as risk appetite improved.

In its latest monthly report, the German Bundesbank stated that the economy should start its recovery course during the second quarter as restrictions imposed to contain the pandemic are gradually lifted. The degree of uncertainty remained extremely high, however, and business activity will significantly undershoot the level recorded in the first quarter of the year due to heavy losses in spending and investment.

The Bundesbank was optimistic over the fiscal outlook due to considerable leeway built up ahead of the crisis. Risk appetite strengthened ahead of the New York open which helped underpin the Euro. Overall dollar demand also dipped sharply with sharp losses against commodity currencies as equity markets rallied strongly.

In congressional testimony on Tuesday, Fed Chair Powell will repeat that the Fed is prepared to use the full range of its tools and will also call on Congress to provide additional support for the economy. Expectations of dovish rhetoric continued to undermine potential dollar support.

The US NAHB housing index improved to 37 for May from 30 the previous month which was above consensus forecasts of 35.0.

Euro-zone sentiment strengthened sharply late in the European session following proposals by Germany and France for a EUR500bn coronavirus reconstruction plan and that there was also agreement that the EU Commission should issue bonds to fund the programme. EUR/USD moved sharply higher to trade above 1.0900 as the dollar maintained a weak tone while Italian bond yields declined sharply.

EUR/USD held above 1.0900 on Tuesday despite concerns that the recovery fund would face major hurdles in being approved with the dollar again losing defensive demand.

In comments at the WHO assembly, Chinese President Xi stated that global supply chains must be kept open. Latest data from China suggested that oil demand had recovered to near levels prevailing ahead of the national lockdown which helped underpin risk appetite as well as maintaining support for crude oil.

Risk appetite was also underpinned by reports that Moderna had achieved positive data in the early stages of its coronavirus vaccine trial. Equity markets moved sharply higher, especially with Germany and Franc proposing a reconstruction package. Overall demand for the Japanese yen declined on defensive grounds and USD/JPY pushed to highs at 107.50 before a retreat to around 107.30 as the US currency lost wider support. Overall yen selling was still contained.

There were further concerns surrounding US-China tensions with further attacks on President Trump by China’s Global Times while Trump threatened to withdraw WHO funding permanently. Regional equities held gains and USD/JPY traded around 107.40 in early Europe.

Sterling sentiment remained generally negative during Monday, but there was significant relief from global factors. Risk appetite gained sharply during the day with big gains for equities and a fresh surge in oil prices. The UK currency’s underlying performance remains correlated strongly with trends in risk appetite and confidence in the global outlook. In this environment, the UK currency was able to post net gains, although underlying sentiment remained negative.

Bank of England Monetary Policy Committee member Tenreyro stated that in her personal opinion negative interest rates have had a positive impact in Europe. She also stated that there were some considerations that would be more specific to the UK and that all options are on the table and that the central bank has not ruled out any policy tool. Expectations of further action by the Bank of England continued to undermine Sterling sentiment and the currency dipped after Tenreyo’s comments, but risk appetite continued to have an important impact.

Labour-market data recorded an increase in the April claimant count of 856,500 compared with consensus expectations of around 680,000. Unemployment in the 3 months to March was held at 3.9% from 4.0% previously while employment increased, although the number of hours worked dipped late in the month. GBP/USD traded above 1.2200 after the data with GBP/EUR around 1.1160.


Economic Calendar

07:00GBP Average Earning Including Bonus(MAR)2.60%2.80%
07:00GBP Claimant Count Change(M/M)(APR)676.5K12.1K
07:00GBP Unemployment Rate(MAR)4.40%4.00%
10:00German ZEW Survey (Current Situation) (MAY)-77.5-91.5
10:00German ZEW Survey (Economic Sentiment)(M/M)(MAY)-42.328.2
10:00EUR Euro-Zone ZEW Survey (Economic Sentiment)(MAY-25.2
11:00The Eurogroup Meeting--
13:30USD Building Permits (M/M)(APR)--7.00%
13:30USD Building Permits(APR)1.115K1.350K
13:30USD Housing Starts(APR)1.000M1.216M
15:00Fed's Chair Powell Testifies--
15:00FOMC Member Kashkari Speaks--

*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.