Risk appetite remained more fragile on Friday amid US coronavirus concerns.

Global equities posted slight net losses with a dip in early Asia on Monday. There was a tentative recovery late in Asia, but caution prevailed. A more defensive risk tone provided an element of dollar support despite increased doubts over domestic fundamentals.

The Euro was undermined by the EU’s failure to secure agreement on the recovery fund. EUR/USD dipped to 1.1170 before a recovery to near 1.1200. Sterling continued to lose ground as budget deficit fears eroded sentiment with EUR/GBP at 11-week highs near 0.9050.

Commodity currencies lost ground on Friday before a limited recovery on Monday as RBA’s Lowe downplayed AUD levels.

The Euro-zone current surplus narrowed to EUR14.4bn for April from EUR 27.4bn the previous month, although there was still a 12-month surplus of EUR334bn and 2.8% of GDP which will provide an element of background currency support. Major central banks, including the ECB, announced that they were cutting back dollar liquidity operations given a lack of demand an underlying improvement in funding conditions. Although this indicates lower underlying US currency demand, the reduction of US liquidity provision could enhance US currency gains if there is a notable slide in risk appetite.

ECB President Lagarde warned that there are market risks if there is no agreement on the recovery fund. She also warned that second-quarter GDP was liable to contract 13% with a 2020 decline of 8.7% before a 5.2% rebound in 2021. Despite Lagarde’s warnings, there was no agreement on the recovery fund at the EU Summit. This came as no surprise as leaders had warned ahead of the meeting that a deal was unlikely this month. Germany and France are exerting strong pressure for a deal by August. The dollar maintained a firm tone amid a more defensive risk tone and weakness in commodity currencies while EUR/USD retreated to lows near 1.1170.

CFTC data recorded a further increase in long, non-commercial positions to 117,000 contracts in the latest week and the highest level since November 2018, limiting the scope for further buying. The Euro did, however, recover some ground on Monday with EUR/USD moving to near the 1.1200 area despite concerns over an increase in German coronavirus cases as the dollar retreated slightly with markets continuing to monitor global coronavirus developments very closely.

Risk appetite was generally fragile during Friday as coronavirus developments continued to cause some alarm with Florida, for example, reporting a further sharp increase in new cases to a fresh record high. Equity markets dipped lower following an announcement that Apple was closing some of its US stores once again. The US S&P 500 index declined 0.55% on the day, although there were still gains for the week.

Fed Chair Powell stated that the US economy will recover, but it will take time and work. Vice-Chair Clarida stated there is more we can do and we will in view that we’re a long way from the Fed’s twin goals. Boston head Rosengren stated that unemployment would be at least 10% by the end of 2020 and considered that further monetary and fiscal support would likely be needed.

Relatively narrow ranges prevailed with USD/JPY settling around 106.85 as both currencies drew an element of support amid the more fragile environment.

As expected, China held interest rates unchanged with the 1-year rate at 3.85%. US equity futures posted limited gains on Monday amid hopes that coronavirus cases would tend to be more localised rather than leading to national lockdowns. The yen lost some ground on the crosses with USD/JPY held just below the 107.00 level.

Sterling was unable to sustain an initial moved higher following the retail sales data with underlying sentiment remaining negative amid expectations of a weak underlying recovery, especially given concerns over labour-market trends. There were also important concerns over a sharp increase in the budget deficit.

The number of new UK coronavirus cases increased slightly on Friday with evidence that the decline in cases has stalled. This development offset a recommendation from the chief medical officer that the coronavirus alert statues should be lowered to 3 from 4. The UK currency was undermined by a more fragile global risk tone and GBP/EUR held above the 1.1050 level with 11-week lows near 1.1022 while GBP/USD weakened to monthly lows near 1.2350.

CFTC data recorded a further decline in short, speculative Sterling positions which suggested that recent currency losses had not been triggered by hedge-fund selling which will curb sentiment. Chancellor Sunak remains under pressure to provide further stimulus with reports that there will be an emergency VAT cut. The government is also expected to announce a further easing of lockdown measures on Tuesday with the social distancing limit expected to be reduced.

Economic Calendar

10:00Euro-Zone Consumer Confidence(JUN)-1518.8
11:00GBP CBI Industrial Trends Orders (JUN)--62
13:30USD Chicago Fed National Activity Index(MAY)--16.74
15:00USD Existing Home Sales(MAY)4.40M4.33M
15:00USD Existing Home Sales Change(MAY)-18.90%-17.80%

*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.