The dollar index maintained a firm underlying tone on Thursday but retreated slightly from 3-week highs.

The dollar index maintained a firm underlying tone on Thursday but retreated slightly from 3-week highs.

Although fragile for much of the day on US-China tensions, risk appetite recovered slightly into the US close

Wall Street indices closed in positive territory which underpinned sentiment in Asia. Chinese data was mixed with retail sales weakness hampering global sentiment.

The Canadian dollar posting net gains as Bank Governor Poloz expressed some optimism over the outlook.  Sterling recovered some ground late in US trading, but overall remained on the defensive with GBP/USD near 1.2200.

In comments on Thursday, President Trump stated that it is a great time to have a strong dollar, in complete contrast to his stance last year that a strong US currency was damaging. He also felt strongly that the US should have negative interest rates, maintaining underlying political pressure on the Federal Reserve.

Although the rhetoric was mixed, the US currency maintained a strong tone into the New York open with EUR/USD trading below the 1.0800 level.

US initial jobless claims declined to 2.98mn in the latest week from a revised 3.18mn the previous week, although this was well above consensus forecasts of 2.50mn. Continuing claims increased to 22.8mn from 22.4mn, although this was below consensus forecasts which suggested there have been some success in securing alternative employment while the insured unemployment rate increased to 15.7%. The initial claims data was, however, inflated by over 250,000 through data-processing errors and a very sharp decline in California continuing claims also distorted the data.

Import prices declined 2.6% for April with a year-on-year decline of 6.8% while export prices declined 3.3% to give a 7.0% annual decline.

The dollar retreated slightly from 3-week highs posted earlier in the day, but maintained a firm tone and EUR/USD was held just below 1.0800 in late Europe. The more defensive risk tone helped underpin the US currency, especially with a lack of attractive alternatives among major currencies.

German GDP will be released later on Friday with consensus forecasts for a first-quarter contraction of 2.2% and EUR/USD held just above the 1.0800 level.

China’s Global Times reported a personal comment from Editor Hu Xijin that US-China conflicts are rising and the risk of a military clash is increasing. President Trump stated that he has a great relationship with Chinese President Xi, but he just didn’t want to talk to him for now. There were further concerns over the underlying deterioration in US relations with China, especially given the US political blame game.

St Louis Fed President Bullard stated that the Fed might decide against publishing forecasts in June. US equities moved lower, although selling pressure was contained and USD/JPY found support near 106.80 before edging higher in tentative trading. As Wall Street indices moved into positive territory, USD/JPY advanced to 107.30.

China’s industrial production beat market expectations with a 3.9% annual increase for April compared with expectations of 1.5%, but retail sales declined 7.5% over the year as domestic demand remained weak. Overall, there was a marginal lift to risk appetite with USD/JPY little changed around 107.20. there will be the risk of choppy trading on Friday with position adjustment ahead of the weekend adding to the potential for significant moves across asset classes.

In comments on Thursday, Bank of England Governor Bailey reaffirmed that negative interest rates are not on the table at the moment, although he also commented that it was wise not to rule anything out forever. He also reiterated that there is a huge amount of uncertainty about economic scarring and it is clear that risks are to the downside. There are still strong expectations that the Bank of England will take action to expand quantitative easing at June’s policy meeting, especially given huge upward pressure on government borrowing which will tend to put upward pressure on bond yields.

The Office for Budget Responsibility (OBR) increased its estimate of the 2020/21 fiscal year budget deficit to £298bn from the previous estimate of £272bn made last month. This would be equivalent to 15.2% of GDP and the highest figure for over 75 years.

Overall Sterling sentiment remained notably fragile amid an underlying lack of confidence in the underlying fundamentals. GBP/EUR consolidated around 1.1300 despite wider vulnerability with GBP/USD trapped just below 1.2200 for most of the day and lows below 1.2170 before a recovery to 1.2230 late in New York. Underlying sentiment remained fragile with GBP/USD slightly lower on Friday and trading just above 1.2200.

Economic Calendar