At the Bank of England auction Dollar demand rose to the highest level since the beginning of April, but the lack of auction last Friday could have distorted demand. Also, the 3 month GBPUSD cross-currency basis swap returned to negative territory, primarily indicating increased demand for Dollars, (also linked to Dollar strength, rising volatility, deteriorating liquidity, monetary tightening in the U.S. relative to other countries, and a decrease of funds in the USD money market. The Pound was also undone by weaker risk appetite and lesser confidence in the UK’s economic fundamentals resulting in a dip to 1.2400 near the US Market open. As risk appetite and oil prices improved the Pound pushed back to 1.2450 and the Euro retreated to near 1.1425.
This morning oil prices have made limited gains and risk appetite appears steady, but concerns remain for the UK outlook and upward pressure on the budget deficit with the CBI warning that the small company outlook was the weakest for 30 years. Sterling kicks off at 1.2465 against the Dollar and the Euro near 1.1430.
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 increasing evidence of underlying dollar demand as money markets showed an element of strain.
The dollar maintained a firm underlying tone with the Euro retreating to the 1.0910 area overnight but losing ground this morning.
The final Euro-zone PMI manufacturing reading declined to 33.4 from 33.6 previously and confirmed at a record low with new orders continuing to slump and employment also declining sharply with overall business sentiment at a record low which will undoubtedly cause fresh concern over the outlook.
Italy eased lockdown restrictions slightly yesterday with around 4.5m employees allowed to return to work. There are however, still major concerns over the risk of a second wave of infections. According to the ECB’s panel of professional forecasters, GDP is likely to decline by 5.5% for 2020 before recovery of 4.3% next year.
As of writing, the Euro trades around the 1.0885 level against the Dollar.
Data to watch
08:30 - GBP - Final Services PMI
14:00 - USD - ISM Non-manufacturing PMI
Tentative - EUR - German Constitutional Court Ruling
Posted in Daily Market News on May 5 2020