Risk appetite was more fragile on Thursday as US-China tensions continued to unsettle confidence.

Global equity markets made further gains on Wednesday as global recovery hopes supported sentiment. The dollar also lost ground with EUR/USD testing the 1.1000 area.

Risk appetite was more fragile on Thursday as US-China tensions continued to unsettle confidence and had a larger impact.

The dollar regained some ground as defensive demand returned with EUR/USD retreating to near 1.0950.

Sterling continued to underperform as speculation over negative interest rates continued with GBP/EUR at 7-lows and pushing towards 1.1130

Commodity currencies still posted net gains, but retreated from their best levels.

The Swiss franc regained some ground as risk appetite dipped.

The Euro-zone current account surplus amounted to EUR27bn for March from EUR38bn the previous month while the 12-month surplus amounted to EUR338bn and 2.8% of GDP. The strong current account position will continue to provide significant underlying Euro support.

The Euro-zone flash consumer confidence reading for May recovered to -18.8 from a revised -22.0 previously and was above consensus forecasts.

Overall global risk appetite held firm during Wednesday which was important in curbing defensive dollar demand. The US currency registered further sharp losses against commodity currencies which also helped underpin the Euro. EUR/USD did, however, hit notable resistance close to the key 1.1000 area. The dollar also pared losses and the pair retreated into the European close.

Minutes from April’s Federal Reserve meeting reiterated that it was committed to using all available tools to support the economy. There were still important downside risks to the economy and inflation over the medium term. There was no support for negative interest rates with the committee considering how to strengthen forward guidance. There was limited overall market reaction with the dollar slightly stronger given further opposition to negative rates.

The latest PMI business confidence readings for both sides of the Atlantic will be released on Thursday with markets looking at the data to assess a potential recovery path out of deep recession. The dollar regained some ground on Thursday as an element of defensive demand returned with EUR/USD around 1.0960.

The US Federal Funds rate moved out of negative territory across the curve which should provide an element of dollar support. Dallas Fed President Kaplan stated that his guess was that the Fed will need to more to support the economy. There was further uncertainty over US fiscal policy.

Overall risk appetite remained strong during Wednesday with further gains for global equities amid hopes for economic recovery. In this context, there was reduced demand for the Japanese yen on defensive grounds, although the US dollar also lost ground during the day as demand faded. With wider US losses, USD/JPY retreated towards the 107.40 area before stabilisation just above 107.50 while the yen lost ground on the main crosses.

Risk appetite was more fragile on Thursday following further US-China tensions with the US Administration accusing China of malign activities while President Trump launched a barrage of negative tweets against China in an attempt to underpin his ratings.

Japan’s PMI manufacturing index declined to 38.4 from 41.9 previously as production declined sharply while the services-sector index recovered slightly to 25.3 from the record low of 21.5 previously. Japan’s exports declined 21.9% in the year to April, the sharpest decline since 2009. Both the dollar and yen regained some ground with USD/JPY around 107.70.

Following the UK inflation data and the headline rate declining to the lowest rate since August 2016 at 0.8%, there was further speculation that the Bank of England would decide to cut interest rates into negative territory, especially with inflation expected to decline further in the short term.

The latest UK government 3-year bond auction also recorded a negative yield for the first time on record. In testimony to the Treasury Select Committee Governor Bailey stated that the bank does not rule out any instrument in principle. He made no direct reference to the possibility of increasing the scope of bond buying to more risky assets. As far as negative interest rates are concerned, Bailey stated that a move was not ruled in or out and the evidence would have to be considered closely. He did, however, stated that his position had shifted a bit which triggered fresh market speculation over a move with EUR/GBP advancing to around 0.8970 and GBP/USD held below 1.2300.

Sterling was supported by firm global risk appetite, but under-performed on most crosses. The UK business confidence data will be watched closely on Thursday and sentiment remained fragile with GBP/EUR at fresh 7-week lows near 1.1120 while GBP/USD dipped to the 1.2200 area as risk conditions turned more cautious.

Economic Calendar

08:15Markit Mfg PMI(MAY)36.131.5
08:15Markit Serv PMI(MAY)27.810.2
08:30EUR German PMI Composite(MAY)34.117.4
08:30EUR German PMI Services(MAY)26.616.2
08:30EUR German Manufacturing PMI (M/M)(MAY)39.234.5
09:00Euro-Zone PMI Manufacturing(MAY)39.233.4
09:00Euro-Zone PMI Services(MAY)23.812
09:00Euro-Zone PMI Composite(MAY)2513.6
09:30GBP PMI Services(MAY)13.4
09:30GBP PMI Manufacturing32.6
13:30USD Philadelphia Fed. Manufacturing Index(MAY)-47-56.6
15:00USD Manufacturing PMI(MAY)3836.1
15:00USD Existing Home Sales(APR)4.40M5.27M
15:00USD Existing Home Sales Change(APR)-8.10%-8.50%
23:45NZD Retail Sales (Q/Q)-0.70%

*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.