Range bound trading in fragile economy
Sterling had a difficult morning with a weaker risk environment and of course, that message from Boris being digested across media outlets. Add to that rumoured discord in the Cabinet over the Covid strategy sapping confidence in it’s effectiveness; specifically traveller quarantine plans. The Pound slumped below 1.2300 on the Dollar and 1.1365 on the Euro and only weak Euro confidence limited further Pound selling.
The Pound found an element of support as equities recovered ground, but domestic concerns persisted, especially with Bank of England Haldane issuing a warning over the medium-term recovery profile. Sterling was unable to gain significant support and traded around 1.2330 at the start of Tuesday trading session.
The Dollar was able to resist further selling pressure with a return of defensive demand for the US currency. With wider Dollar strength and gains to 2-week gains for the dollar index, the Euro weakened to just below the 1.0800 before picking up a bit of strength in the early hours of Tuesday morning.
Market strains had eased after the Fed’s action, stated Governor Quarles but that more may be required of the central bank before the crisis is over. Chicago Fed President Evans also stated that negative interest rates are unlikely to be used as a tool in the US while the central bank is prepared to do everything it can to support employment. Markets will be waiting for further clarity from Fed Chair Powell in a public appearance scheduled for Wednesday.
Euro-zone data remained very weak with Italian industrial production declining 28.4% for March to give a year-on-year decline of 29.3%.
German Chancellor Angela Merkel was reported to have stated that the German Constitutional Court ruling had great importance, reinforcing concerns over a potential rift between Germany and the EU. Further comments also implied however, that the situation was solvable. There were also concerns over the German coronavirus infection rate with reports that the R rate had increased to 1.13 over the weekend. A sustained rate above 1.0 could potentially trigger a sharp rise in cases over the next few weeks and reversing and easing of the current lockdown measures.
As of writing the Euro trades around the 1.0820 against the Dollar.
Data to watch
12:30 – USD – CPI
12:30 – USD – Core CPI