Risk appetite overall has held firm amid extremely low global interest rates and optimism over a gradual easing of lockdown restrictions.

Risk appetite overall has held firm amid extremely low global interest rates and optimism over a gradual easing of lockdown restrictions.

Although US equities closed lower, there were fresh gains for futures on Wednesday which underpinned global bourses. The dollar moved sharply lower in early Europe on Tuesday with some evidence of month-end positioning. Despite a rally later in the day selling returned on Wednesday.

EUR/USD advanced to 1.0890 before settling around 1.0850 as the dollar index lost ground.

Sterling failed to hold its best levels with GBP/USD selling above 1.2500. Commodity currencies made net gains with AUD/USD at fresh 6-week highs. The Swedish krona strengthened as the Riksbank decided against an interest rate cut.

The dollar dipped sharply early in the European session as firmer risk conditions curbed demand for the US currency. The German IFO institute forecast that GDP would contract 6.6% in 2020. Spain announced that it was aiming for a return to normal at the end of June with further limited easing of restrictions over the next few weeks.

EUR/USD strengthened to highs at 1.0890 just ahead of the New York open, but there was a correction in US trading with a retreat to near 1.0850.

US consumer confidence declined sharply to a 6-year low of 86.9 for April from 118.8 the previous month and slightly below consensus forecasts. The current conditions component slumped to 76.4 from 166.7 and this was the largest monthly decline on record, but there was a small improvement in the expectation’s component to 93.8 from 86.8. Consumers expect overall conditions to improve slightly over the next six months, although a small majority expected their own income prospects to decline.

The Richmond Fed manufacturing index declined very sharply to -53 for April from +2 the previous month with new orders and backlogs both declining sharply. The number of employees declined while wages were unchanged and overall skills shortages eased slightly.

There was evidence of month-end dollar selling in relation to portfolio rebalancing which is liable to continue Wednesday. There was also an element of caution ahead of Wednesday’s Federal Reserve policy decision and the dollar regained some ground later in the session with EUR/USD settling around 1.0830.

Fitch downgrade the Italian credit rating to BBB- with a stable outlook with a warning that the government debt ratio is likely to increase 20% this year with a GDP contraction of 8%. The ECB will still accept Italian debt as collateral which will limit the impact. The dollar lost ground on Wednesday amid a decline in in defensive demand ahead of the Federal Reserve and GDP data with expectations that the Fed would continue to offer reassurance and EUR/USD traded around 1.0850.

The dollar remained on the defensive against the yen ahead of the New York open as wider losses undermined sentiment. A break below the 107.00 level also undermined sentiment with USD/JPY retreating to 5-week lows below 106.60.

The US currency regained some ground in New York, but USD/JPY failed to regain the 107.00 level as the Japanese currency maintained a firm underlying tone.

US congress continued to debate potential stimulus measures with House speaker Pelosi stating that a $400-500bn support package was being considered for state and municipal governments. Markets remained uneasy over medium-term deficit trends which could weigh on the US currency with a potential $5trn deficit this year.

Asian equity markets secured net gains which underpinned risk appetite, although the yen maintained a firm tone. USD/JPY edged lower to near 106.50 with activity curbed by a Japanese market holiday. There is likely to be choppy trading late in the session with key US events triggering currency moves.

Sterling secured strong gains early in Europe, primarily under the influence of solid risk conditions and a weaker US dollar with a GBP/USD move above 1.2500 for the first time in over a week. The headline CBI retail sales index declined to-55 for April from -3 previously and equalled the record low for this survey.  Expectations also declined to a record low of -54 for May. Although food sectors had reported strong growth for March, sales dipped for April as social distancing restrictions curbed shopping numbers.

Easier financial conditions were illustrated by a decline in demand for Sterling funds at the latest Bank of England auction to 6-week lows.

Prime Minister Johnson stated that social distancing rules would be reviewed by May 7th and coronavirus testing will be expanded. Markets will remain of choppy trading heading into the month-end period, especially with important central bank meetings over the next two days.

Sterling lost ground later in the day, primarily due to a dollar recovery, but there was GBP/USD support above 1.2400 with a recovery to 1.2475 on Wednesday as expectations of a dovish Fed statement undermined US currency support.

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