Frosty Brexit talks
Sterling continues to be hampered by underlying budget deficit fears following reports that the deficit would still be 5% of GDP by 2024. After an element of optimism earlier in the week, sentiment soured after trade talks with the EU, once again concluded with no breakthrough. UK Chief Negotiator David Frost stated that the EU would need to change its negotiating position in order to secure agreement and he was doubtful whether a deal on fishing was achievable by the end of June, especially given difficulties in virtual meetings. EU’s Barnier stated that a 2-year transition extension was available, but the UK government maintained its end-2020 deadline.
The Pound dipped lower amid further speculation the Bank of England could introduce negative interest rates. Governor Bailey stated that the bank is prepared to do more to combat coronavirus fallout using existing tools and would take a look at more radical measures while recovery risks were to the downside. The comments reinforced speculation that the bank could opt for negative interest rates which curbed UK currency support.
Overall, Sterling declined to lows near 1.2200 against the Dollar with the Euro strengthening to near 1.1125. There is the potential for choppy trading over the next two days, especially with month-end positioning.
The dollar overall was initially on the defensive yesterday amid expectations of global recovery and an underlying dip in defensive demand. The US currency did, however, regain ground in New York, especially with a sharp correction in commodity currencies and underlying reservations over the underlying global outlook.
The Richmond Federal Reserve (Fed) manufacturing index recovered to -27 for May from a record low -53 the previous month. New orders also declined at a slower pace while employment levels also declined on the day. The Fed Beige Book stated that economic activity declined in all districts in the latest period and fell sharply in most areas. Many contacts were pessimistic over the potential rate of recovery and there were further concerns over job losses.
The EU Commission proposed a EUR750bn fund to support the economic recovery with EUR500bn in grants and a further EUR250bn in loans. There was also a proposal for EUR1.1trn in the next long-term budget. Sweden objected to the recovery fund but a positive reaction from France and Germany as well as the EU parliament initially pushed the common currency above the 1.1000 level against the Dollar to a 2-month peak, maxing out and finding resistance at 1.1035.
ECB President Lagarde stated yesterday that the mild ECB scenario was outdated with the economic contraction seen as somewhere between medium and severe. She insisted that there would be no new Euro debt crisis after the pandemic. The Euro gained some support on expectations of further bond buying and Italian bond yields declined.
As of writing, the Euro finds itself at the 1.1008 level against the Dollar.
Data to watch
10:00 – GBP – MPC Member Saunders Speaks
12:30 – USD – Prelim GDP
12:30 – USD – Core Durable Goods Orders
12:30 – USD – Durable Goods Orders
12:30 – USD – Unemployment claims
14:00 – USD – Pending Home Sales