Sterling dipped sharply as underlying sentiment remained negative before a slight recovery after Q1 GDP data.

The dollar lost ground during Tuesday as weak CPI inflation data reinforced expectations of extremely low interest rates. There was also a further debate surrounding negative interest rates, maintaining uncertainty.

EUR/USD advanced to trade around 1.0850 despite Euro-zone reservations. Risk appetite overall was little changed for most of the day, but US equities dipped sharply in late trading amid medium-term coronavirus fears.

Sterling dipped sharply as underlying sentiment remained negative before a slight recovery after Q1 GDP data. There was choppy trading in commodity currencies with net losses amid reservations over the global growth outlook.

There were no major Euro-zone developments during Tuesday with markets continuing to monitor developments surrounding the ECB and German Constitutional Court.

The US NFIB small-business confidence index declined to 90.7 for April from 96.4 previously and the lowest reading since March 2013, although this was above consensus forecasts with a very weak current conditions offset by expectations of a recovery on a six-month view.

US Consumer prices declined 0.8% in April, in line with consensus forecasts. Prices had already declined 0.4% for March and the year-on-year rate declined to 0.3% from 1.5% previously and the lowest reading since November 2015. Core prices declined 0.4% for the month compared with market expectations of 0.2% and the annual rate declined to 1.4% from 2.1% previously, the weakest reading since March 2011.

St Louis Fed President Bullard stated that a prolonged shutdown risks bankruptcy and depression. In this context, a risk-based approach was needed rather than a blanket shutdown policy. Dallas Fed President Kaplan stated that he would be against negative interest rates due to the impact on intermediaries and money-market funds and he was sceptical that benefits would offset the costs.

Minneapolis head Kashkari stated that Fed policymakers have been pretty unanimous in opposing negative interest rates. Personally, he did not want to say never, but there were other things the Fed could do first.

President Trump backed negative interest rates and comments from Fed Chair Powell will be watched closely on Wednesday. The dollar overall lost ground during New York trading and EUR/USD strengthened to highs around 1.0880 before consolidating around 1.0855. The Euro retreated slightly in early Europe as the dollar gained an element of defensive demand, but EUR/USD was just above 1.0850.

Risk appetite stabilised early in the European session after comments from the Chinese foreign ministry that both sides should implement the phase-one trade deal with equality and mutual respect. The World Health Organisation (WHO) also stated that some treatments appear to be limiting the severity or length of the Covid-19 disease. Equity markets were unable to make headway in early New York which limited potential yen selling and USD/JPY retreated to lows near 107.20 amid wider selling.

There was also a sharp decline in US equities late in the US session amid sharp selling in the technology sector. US medical adviser Fauci also warned against a rapid re-opening of the economy and there were further fears over the longer-term recovery profile.

The Chinese Jilin province announced a lockdown in Jilin City amid a coronavirus outbreak and underlying risk appetite remained fragile amid fears over further spikes in cases. The yen, however, was unable to gain substantial traction and USD/JPY held just above 107.00 in early Europe.

In comments on Tuesday, Bank of England Deputy Governor Broadbent stated that the central bank would have to consider the pros and cons of negative interest rates. Cutting rates below zero could stimulate demand but would also have a negative impact on the banks and potentially undermine the banking sector. Broadbent also commented that it was quite possible that further monetary easing would be required.

Chancellor Sunak announced that the furlough scheme would be extended until October and would remain at 80% of earnings, although he also stated that companies would have to share some of the costs from the end of July. Overall confidence in the UK outlook remained weak with further concerns that the government was finding it difficult to engage in an effective strategy to ease lockdown measures.

Sterling briefly rallied against the weaker dollar, but selling pressure increased sharply during the New Yok session. GBP/EUR fell sharply with a break below 1.1354 helping to trigger a further decline to 12-week lows around 1.1290 with GBP/USD lows near 1.2250.

Barclaycard recorded a 36% decline in card spending for April. GDP declined 2.0% for the first quarter of 2020 compared with market expectations of 2.5% with a year-on-year decline of 1.6%. Industrial production also fell less than expected and Sterling gained marginal relief, but GBP/USD was held below 1.2300.

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