Sterling remained fragile amid a lack of confidence in domestic fundamentals.

There were subdued conditions on Monday with UK and US holidays dampening activity.

There were further concerns over US-China tensions, but risk appetite strengthened on Tuesday amid coronavirus vaccine and global re-opening hopes. The Euro was hampered by doubts whether Franco-German recovery fund plans would be approved.

The dollar held a firm tone on Monday, but retreated on Tuesday as risk appetite improved with EUR/USD recovering to the 1.0925 area.  Commodity currencies secured limited net gains with AUD/USD near 0.6580.

Sterling remained fragile amid a lack of confidence in domestic fundamentals, but with GBP/USD above 1.2200. The Euro continued to lose ground on Friday as underlying dollar demand increased slightly with EUR/USD retreating to the 1.0900 area.

According to the CFTC data, there was a small decline in overall Euro long positions, although there is still a significant position which will limit the scope for Euro gains.

Over the weekend, there was significant opposition to the Franco-German proposal for a EUR500bn recovery scheme which would be funded through grants. The Finance Ministers of Denmark, Sweden, Netherland and Sweden opposed the scheme and called for low-cost loans instead. The EU Commission will publish its own proposals on Wednesday with markets watching the overall political developments very closely.

The German IFO business confidence index strengthened to 79.5 for May from a revised 74.2 previously and above consensus forecasts. A further small decline in the current conditions component was offset by a significant recovery in the expectations component.  According to the IFO, sentiment amongst German companies had recovered somewhat after a catastrophic few months. The gradual easing of lockdown measures will offer a glimmer of hope, but many companies are still pessimistic.

ECB Council member Villeroy stated that the bank would probably need to go further with further flexibility on the bond-buying programme, reinforcing expectations of increased bond buying. Narrow ranges prevailed given the US Memoria Holiday with some EUR/USD support below 1.0900. The dollar lost ground on Tuesday amid a dip in defensive demand as commodity currencies made limited gains and EUR/USD recovered to the 1.0925 area as German consumer confidence recovered slightly.

Underlying concerns over US-China relations remained an important factor in currency markets, especially given the situation in Hong Kong. There were further strong protests during the weekend in response to China’s proposed new security laws and Hong Kong’s security chief called for measures to be implemented as soon as possible. There was further strong criticism from the US which maintained some vulnerability surrounding risk appetite.

It was still the case that the yen and dollar tended to move together with increased demand for both currencies when risk appetite was less robust. Equity markets were also able to make headway following Japan’s announcement that the coronavirus state of emergency would be lifted.

US equity futures moved higher on Tuesday with a fresh bout of optimism over a potential vaccine with Novavax set to begin its trial in Australia.

Bank of Japan Governor Kuroda stated that the economy remains in a severe situation with risks skewed to the downside and the central bank was ready to act without hesitation. The yen lost ground on crosses although there was still cautious over US-China trade tensions with USD/JPY around 107.85 as narrow ranges prevailed.

UK bond yields continued to move lower on Friday with the 5-year yields dipping into negative territory on speculation that the Bank of England would decide on negative interest rates. Sterling lost ground on Friday with GBP/USD below 1.2200, although overall ranges were relatively narrow.  Underlying sentiment remained weak following the slide in retail sales and surge in government bowing with April’s borrowing requirement close to the total for the whole of fiscal 2019/20.

CFTC data recorded that non-commercial operators increased their net short Sterling for the 11th successive week with the overall total at the highest since December 2019, illustrating underlying negative sentiment on the currency as fundamental concerns persisted.

Trade tensions were also a significant background factor with German European Minister Roth stating that time was running out for a deal by the end of 2020. There was, however, some wariness over the potential for short covering GBP/USD settling just below 1.2200 while GBP/EUR was around 1.1200.

The government announced a limited re-opening of retail shops from June 1st, but this was over-shadowed by the on-going political row over Prime Minister Johnson’s chief adviser and overall Sterling sentiment remained fragile. Firm risk conditions provided an element of Sterling support on Tuesday as GBP/USD traded around 1.2230.

Economic Calendar

07:00CHF Trade Balance(APR)-3.962B
07:00German GfK Consumer Confidence (JUN)-18.3-23.1
07:30Employment Level-5.130M
11:00CBI Distributive Trades Survey(MAY)-40-55
13:30USD Chicago Fed National Activity Index(APR)--4.19
13:45ECB Lane speech--
14:00US House Price Index (M/M)(MAR)-0.70%
15:00USD CB Consumer Confidence(MAY)85.586.9
15:00USD New Home Sales Change(APR)-17.00%-15.40%
15:00USD New Home Sales(APR)500M627M
15:30USD Dallas Fed Manufacturing Business Index(MAY)--73.7
18:00FOMC Member Kashkari Speaks--
22:00Gov Council Member Wilkins Speaks--
22:00BoC Gov Poloz Speaks--
22:00NZD RBNZ Financial Stability Report--

*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.