The dollar was generally weaker amid a dip in defensive support with the US index at 2-month lows.

The dollar was generally weaker amid a dip in defensive support with the US index at 2-month lows, although it was resilient against commodity currencies.

The Euro continued to gain ground during Thursday and EUR/USD advanced to 2-month highs near 1.1100. Risk appetite was solid, but US-China concerns were an important background factor which dampened support for commodity currencies.

Markets were braced for choppy trading on Friday, especially with month-end positioning. Sterling resisted losses, but trade fears and BoE easing expectations limited support and EUR/GBP tested 2-month highs.

Euro-zone industrial sentiment recovered slightly to -27.5 for May from -32.5 previously, but there was a further dip in services sentiment to -43.6 from -38.6 previously while the overall business and consumer survey recovered only slightly for the month.

The German CPI inflation rate declined to 0.6% from 0.9% the previous month and in line with consensus expectations, maintaining pressure an expansive ECB policy.

The Euro maintained a solid tone ahead of the New York open and EUR/USD traded around the 1.1000 level, although there were still reservations whether the EU Commission EUR750bn recovery package would be agreed given opposition from fiscally-conservative countries.

US first-quarter GDP was revised to an annualised rate of -5.0% from the first reading of -4.6% despite a slightly smaller rate of contraction in consumer spending. Jobless claims declined to 2.12 million from 2.45 million the previous week. This was the lowest reading for 10 weeks, although claims have been above consensus forecasts for the past 11 weeks in succession. Continuing claims declined to 21.0 million from 24.9 million previously, although markets were wary of distortions.

Durable goods orders declined 17.2% for April compared with market expectations of a 19.0% decline with underlying orders declining 7.4% on the month.

The dollar maintained a weaker tone into the European close with further evidence of month-end dollar selling on positioning grounds and a lack of defensive dollar demand. EUR/USD strengthened to above 1.1080 and the dollar remained on the defensive on Friday with EUR/USD at fresh 2-month highs just above 1.1100.

The dollar was contained in narrow ranges ahead of the New York open with USD/JPY held below the 108.00 level and there was a measured reaction to the US data releases. Japanese yen demand was relatively subdued with the Euro making headway while USD/JPY edged lower to 107.60 amid wider losses.

There was further unease over the US-China situation with President Trump set to hold a press conference on Friday and potentially outline sanctions against China. Markets will also monitor comments from Fed Chair Powell on Friday with a particular focus on any comments on yield-control measures.

Japanese retail sales declined 13.7% in the year to April while industrial production registered a dip of 9.1% compared with market expectations of 5.1%.

The Chinese yuan remained vulnerable, close to record lows, and risk appetite was generally fragile. The Japanese yen secured an element of defensive support and there was uncertainty surrounding Chinese PMI data due over the weekend. USD/JPY overall remained on the defensive with a retreat to the 107.20 area.

In comments on Thursday, Bank of England external member Saunders stated that it was safer to ease on the side of easing policy too much and then tighten later if needed. Some recovery is economic activity is likely as lockdown eases, but there were downside risks to the outlook and the potential for a weak recovery. He also considered the risk that the UK would fall into a low inflation trap and stated that he backed further bond purchases at the May meeting as data into the June meeting was unlikely to negate the case for further easing. As far as negative interest rates are concerned, he commented that he would not rule them out, but not necessarily rule them in either.

Overall, there is a very strong probability that Saunders will back further easing at the June meeting.

UK chief negotiator Frost reiterated that little progress had been made in EU trade talks and that the UK government would not back calls for the transition period to be extended. Overall Sterling confidence remained fragile, especially with unease over trade developments and wider concerns over government policy.

Sterling dipped after Saunders comments, but there was GBP/USD support below 1.2250 and it pushed above 1.2300 later in the day as the US currency lost traction once again. GBP/EUR found support around the 1.1120 area. The May Lloyds business confidence index edged lower to an 11-year low of -33 from -32 previously despite a slight easing of lockdown restrictions. GBP/USD held firm near 1.2350 given the weak dollar, but GBP/EUR continues to hold around 1.1120.

Economic Calendar

07:00GBP Nationwide House Prices (M/M)(MAY)-0.30%0.70%
07:00GBP Nationwide House Prices (Y/Y)(MAY)2.50%3.70%
07:00EUR German Retail Sales (M/M)(APR)-12.00%-4.00%
07:00EUR German Retail Sales (Y/Y)(APR)-14.30%-1.20%
07:45Consumer Spending MM(APR)-5.50%-17.90%
08:00CHF KOF Leading Indicator(MAY)63.563.5
10:00CPI (EU Norm) Prelim MM(MAY)-0.30%0.10%
10:00CPI (EU Norm) Prelim YY(MAY)-0.20%0.10%
10:00CPI (EU Norm) Final YY*(MAY)-0.30%0.10%
10:00CPI (EU Norm) Final MM*(MAY)0.10%0.50%
10:00Euro-Zone CPI (Y/Y)(MAY)0.10%0.70%
13:30USD PCE Core Price Index (Y/Y)(APR)1.60%1.70%
13:30USD PCE Core Price Index(M/M)(APR)--0.30%
13:30USD Personal Income (M/M)(APR)-8.30%-2.00%
13:30USD Personal Spending (M/M)(APR)-9.70%-7.50%
13:30CAD GDP (M/M)(MAR)0.10%0.20%
13:30CAD GDP (Y/Y)-1.47%
13:30CAD GDP Annualized (Q/Q)0.30%0.30%
13:30CAD RMPI (M/M)(APR)-13.60%-15.60%
14:45USD Chicago PMI(MAY)4035.4
15:00USD Michigan Consumer Sentiment(MAY 01)73.773.7

*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.