Risk appetite was more vulnerable on Friday as global trade fears persisted.

Risk appetite was more vulnerable on Friday as global trade fears persisted.

EUR/USD strengthened above 1.1000, but failed to hold the gains and closed below this level. Sentiment weakened further on Monday as US-China tensions continued to increase amid the political blame game.

The dollar secured fresh defensive support with EUR/USD below 1.0950. Sterling retreated after Thursday’s month-end related gains, especially with global risk appetite more vulnerable.

In its latest bulletin, the ECB reiterated that Euro-zone GDP could decline as much 15% for the second quarter with a protracted an incomplete recovery thereafter. There was, however, a risk that the economy would not regain 2019 levels until 2022, maintaining caution over the near-term outlook.

Overall trading volumes were dampened by market holidays in many European countries, but the Euro held a firm tone into the New York open.

The US ISM manufacturing index declined to 41.5 for April from 49.1 previously and the lowest reading since April 2009, although this was above consensus expectations. New orders slumped to 27.1 from 42.2, the sharpest 1-month decline since 1951 with production at a record low of 27.5 from 47.7. Employment declined very sharply on the month to the third lowest reading in history and prices also declined at a slightly faster pace. There was a further sharp lengthening in supplier delivery times which was important in pulling the headline figure higher and the underlying figure was much weaker.

The dollar overall was resilient after the data amid renewed defensive demand and commodity currencies moved lower. The Euro secured a stronger tone and EUR/USD pushed above the 1.1000 level for the first time in a month, but failed to hold the gain and settled around 1.0980.

CFTC data recorded a small decline in long non-commercial positions, but the overall stance will limit the scope for single-currency gains unless there is strong investor demand. The dollar secured renewed demand on Monday as risk appetite remained weaker and commodity currencies dipped with EUR/USD declining to the 1.0930 area.

Global equities continued to move lower ahead of Friday’s New York open with a generally risk-averse tone. The Japanese yen was able to secure fresh demand on defensive grounds and the dollar retreated to the 106.60 area. The yen failed to gain fresh support in early New York and USD/JPY briefly strengthened to 107.40 before a retreat back below 107.00 as equities remained under pressure.

The Federal Reserve announced that it would cut daily purchases of Treasuries to $8bn from $10bn previously as financial-market pressures eased slightly.

In comments over the weekend, US Secretary of State Pompeo stated that there was significant evidence that coronavirus emanated from a Chinese laboratory in Wuhan and there was further criticism of China for downplaying the outbreak in early stages. President Trump also continued to criticise China and risk appetite remained fragile in Asia on Monday.

China and Japan were both closed for holidays on Monday which limited market reaction to some extent. Japan’s Prime Minister Abe is expected to extend the state of emergency until the end of May. Overall, USD/JPY settled around 106.75 in early Europe amid the more nervous mood.

The final reading for the UK manufacturing PMI index declined to 32.6 from the flash reading of 32.9 and confirmed at a record low. Companies still expect a slight recovery in output over the next 12 months, although overall confidence remained at historic lows, especially with overseas orders also declining very sharply.

Mortgage approvals declined to 56,000 for March from 74,000 the previous month and there was a sharp repayment of consumer credit during the month with a £2.4bn net repayment in credit cards with the first annual contraction on record. The data reinforced underlying concerns over the economic outlook which limited currency support. Sterling had been boosted by month-end position adjustment on Thursday and there was a reversal on Friday as investors took advantage of higher levels to sell. GBP/USD dipped below 1.2500 while GBP/EUR dipped towards 1.1370 as Sterling confidence dipped.

CFTC data recorded a small net increase in Sterling short positions, but the overall implications are likely to be limited. Markets did take notice of seasonals which indicate that Sterling usually weakens against the dollar during May.  Weaker risk appetite was significant on Monday and there was unease that the UK would find it difficult to exit from lockdown measures.

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