Risk appetite held firm on Wednesday with optimism over a rebound in global economy later in 2020 despite a 4.8% US Q1 GDP decline.

Risk appetite held firm on Wednesday with optimism over a rebound in global economy later in 2020 despite a 4.8% US Q1 GDP decline. The Federal Reserve made no policy changes but reiterated that strong support for the economy would continue and Chair Powell suggested further measures were likely.

Global equities posted strong gains with hopes that remdesivir would cut coronavirus recovery times another positive factor, although Chinese PMI data was mixed.

The dollar lost ground during the day as defensive demand faded, although the Euro struggled to make headway with EUR/USD around 1.0860. Although risk conditions were supportive, Sterling was hampered by domestic concerns.

Commodity currencies made further gains with notable gains for the Canadian dollar as USD/CAD dipped below 1.3900.

Euro-zone money supply growth strengthened to 7.5% in the year to March from 5.5% previously. German CPI inflation slowed to 0.8% for April from 1.4%, but slightly above consensus forecasts of 0.7% with limited policy implications. The dollar secured limited net gains ahead of the US open with EUR/USD drifting just below 1.0850.

According to the advance reading US first-quarter GDP declined at an annualised rate of 4.8%. Consumer spending declined 7.6% for the quarter with investment also registering a significant contraction. Net exports were positive as imports declined sharply while government spending made a small positive contribution.

Overall reaction was limited, especially with expectations that the US central bank would maintain aggressive monetary policy.

The Federal Reserve held interest rates in a 0.00-0.25% range, in line with consensus forecasts. According to the statement, the coronavirus outbreak and on-going public-health crisis will weigh heavily on economic activity, employment and inflation. It also poses considerable risks over the medium term and the committee expects interest rates to remain at current extremely low levels until it is confident that the economy is on track to achieve maximum employment and inflation goals. The Fed will also continue to buy bonds in amounts to support smooth market functioning and continue to offer large-scale repo operations.

The dollar edged lower in an immediate reaction to the statement. Chair Powell stated that the Fed is not going to be in a hurry to withdraw support and he also stated that he believed there will be the need for the central bank to do more. The dollar held limited losses following Powell’s comments with EUR/USD near 1.0880. The US currency remained vulnerable on Thursday, but uncertainty ahead of the ECB policy meeting later in the day limited Euro support as the pair traded around 1.0855. French GDP contracted 5.8% for the first quarter of 2020.

The dollar was little changed ahead of the New York open and then failed to gain significant traction despite a stronger tone in risk appetite. Equities made significant gains after more positive news on a key coronavirus drugs trial and crude oil prices also secured strong gains with the latest data suggesting that gasoline demand had recovered significantly in the latest week. The yen remained resilient and USD/JPY was held just above the 106.50 level.

US equities continued to post strong gains following the Federal Reserve statement while bond yields were little changed. The dollar was able to resist further losses, but failed to make significant headway against the Japanese currency with the yen still resilient despite firm risk conditions.

China’s PMI manufacturing index retreated to 50.8 for April from 52.0 previously while the non-manufacturing index strengthened to 53.2 from 52.3. The Caixin PMI index, however, dipped back into contraction territory at 49.4 from 50.1. Total orders declined for a third successive month with a sharp downturn in export orders, reinforcing unease over short-term trends as employment declined. China’s Beige Book also reported difficult conditions with only 4% of companies operating at full capacity. Japan’s industrial production declined 3.7% for March compared with consensus forecasts of a 5.0% contraction.

Asian equities posted gains, but the yen maintained a firm underlying tone ahead of Golden Week holidays next week and USD/JPY was held close to 106.50 and close to 5-week lows.

Sterling gradually drifted lower on Wednesday as confidence in the domestic outlook remained fragile. There were further concerns that the UK would find it difficult to ease lockdown measures. GBP/USD dipped below 1.2400 before recovering ground as stronger risk appetite provided net support.

The UK recorded a sharp increase in the coronavirus death toll as it included fatalities occurring in care homes for the first time. Overall, there were further concerns that the UK would lag behind other European countries in securing economic recovery which sapped support. In this environment, Sterling was less buoyant than other risk-sensitive currencies. Foreign Minister Raab reiterated that the government would not seek an extension to the December 2020 transition deadline.

Economic Calendar