Andrew Bailey, the Bank of England Governor confirmed that negative interest rates are not on the table at the moment, some reassurance after the news that their pros and cons were debated. Bailey also reiterated the huge uncertainty surrounding the economic fallout but that it is clear that risks are to the downside. The market still strongly expects the QE program to be expanded at June’s policy meeting, especially given the increase in government borrowing which will tend to put upward pressure on bond yields. The Office for Budget Responsibility (OBR) revised its 2020/21 fiscal year budget deficit estimate up to £298bn, an additional £26bnon last month’s estimate of £272bn and the equivalent of 15.2% of GDP – the highest number for more than 75 years.
The Pound remained fragile and the lack of confidence in the underlying economic fundamentals allowed the Euro to shrug off it’s own woes to settle around 1.1300. Sterling spent most of the day below 1.2200 on the Dollar but clawed back to 1.2230 after the European markets had closed. The Pound is slightly lower this morning and underlying sentiment remains fragile.
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 (Fed). Although the rhetoric was mixed, the US currency maintained a strong tone yesterday, against the Euro 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.b 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 highs posted overnight as commodity currencies rallied. The more defensive risk tone helped underpin the US currency, especially with a lack of attractive alternatives among major currencies.
The Euro is again on the back foot for the third consecutive session today, coming under extra pressure on improved sentiment around the Dollar. Leaving the common currency struggling in between a tight range of 1.0775 and 1.0810.
Investors’ attention still remains largely on any coronavirus developments and the slow resumption of economic activity in Euroland.
German Producer Prices date, which has already had its release contracted 0.7% inter-month and 1.9% on a year to April. Still in Germany, flash Q1 GDP figures will shed an initial gauge of the impact of the COVID-19 on the domestic economy.
Data to watch
08:00 – EUR – German Prelim GDP
12:30 – USD – Core Retail Sales
12:30 – USD – Retail Sales
14:00 – USD – Prelim UoM Consumer Sentiment