Sterling came under pressure before recovering some ground as global risk appetite improved.

Risk appetite remained fragile on Monday, but US equities moved higher in late trading to post net gains with sentiment making net gains in Asia on Tuesday.

US-China tensions were still significant in curbing investor interest. The dollar made net gains with some evidence of renewed global funding pressures and EUR/USD retreated to the 1.0900 area.

Sterling came under pressure before recovering some ground as global risk appetite improved.

Commodity currencies demonstrated some resilience with net gains as risk conditions improved and oil prices made further net gains. The Australian Reserve Bank held rates at 0.25% with global risk more important in helping to underpin AUD/USD.

The final Euro-zone PMI manufacturing reading declined to 33.4 from the flash reading of 33.6 and confirmed at a record low. The indices for France and Italy declined to record lows with indices in other countries all at the lowest level for 11 years. New orders continued to slump and employment also declined sharply with overall business sentiment at a record low which will cause fresh concern over the outlook.

The Euro-zone Sentix investor confidence index secured only a marginal recovery to -41.8 for May from -42.9 the previous month and below consensus forecasts of -33.5 as underlying confidence in the Euro-zone outlook remained weak despite gradual moves to ease economic restrictions.

Italy eased lockdown restrictions slightly on Monday with around 4.5mn employees allowed to return to work, but there were still concerns over the risk of a second wave of infections. According to the ECB’s panel of professional forecasters, GDP is likely to decline 5.5% for 2020 before a recovery of 4.3% next year.

The New York business conditions index declined to 4.3 for May from 12.9 the previous month and a reading of 50.2 in March. Factory orders declined 10.3% for March, compared with consensus forecasts of a 9.8% decline. There was also increased evidence of underlying dollar demand as money markets showed an element of strain. The dollar maintained a firm underlying tone with EUR/USD retreating to the 1.0910 area in late Europe.

Markets will monitor the German Constitutional Court ruling on Tuesday in case limits are put on the Bundesbank’s ability to participate in the bond-buying programme while a surprise decision to block purchases would be likely to weaken the Euro sharply and EUR/USD was held just above 1.0900 in early Europe.

An editorial in the China Times, run by the Communist Party, stated that US Secretary of State Pompeo was bluffing in his claims against China and called on Washington to present its evidence. There were media reports that the ‘Five-Eyes’ intelligence consortium led by the US stated that China had deliberately suppressed or destroyed evidence of the coronavirus outbreak, but there was no confirmation of the report. Underlying tensions remained high, especially with concerns that the US could look to impose fresh trade sanctions on China and an internal Chinese document warned of an international backlash against the country.

Richmond Fed President Barkin stated that more workers were at risk of leaving the workforce without more support. Overall, the dollar gained support from increased risk aversion as equity markets declined. The yen, however, was also resilient with USD/JPY retreating to the 106.70 area.

There were further underlying concerns over US-China trade tensions with the Administration accelerating plans to shift global supply chains away from China. The yuan recovered ground in offshore trading which provided an element of relief and risk appetite held steady, but USD/JPY was held just above 106.50.

In the latest Bank of England auction, dollar demand increased to the highest level since April 1st, although there was no auction on Friday which may have increased underlying demand. The 3-month Sterling-dollar cross-currency basis swap has returned to negative territory in the past week, indicating a renewed increase in demand for dollars. Sterling was also undermined by the more fragile tone surrounding global risk appetite as well as a lack of underlying confidence in fundamentals. GBP/USD declined to lows near 1.2400 around the New York open.

Risk appetite recovered later in US trading with oil prices also making headway and GBP/USD rallied to near 1.2450 while GBP/EUR rallied to near 1.1420. Risk conditions held steady on Tuesday with oil prices making further limited gains.

There were, however, further concerns over the underlying UK outlook and upward pressure on the budget deficit with the CBI warning that the small company outlook was the weakest for 30 years.

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