Weaker risk appetite affecting Sterling
The UK government announced easing of leisure-sector lockdown measures from July 4th and medical experts warned of the threat posed by a second wave of infections, leaving markets uneasy over the risks. Again weaker global risk appetite had a notable impact in undermining Sterling support. Michel Barnier stated that the UK showed “no willingness to engage” in key areas despite EU efforts to make a number of openings. Barnier also complained that the UK refuses to commit to a level playing field, but requested the status of being very close to the EU single market in financial services. Talks on financial services equivalence will not conclude before the June 30th deadline. The Pound fell steadily to lows near 1.2410 against a stronger US dollar as equities remained under pressure and the Euro held around 1.1050.
Market expectations are rising that the Bank of England will sanction additional quantitative easing by the end of 2020. Overnight, reports emerged that the EU was prepared to compromise on the level playing field issue which could be a positive factor, but Sterling hasn’t benefitted as fragile global risk appetite constrained it. The Pound opens around 1.2420 on the Dollar and circa 1.1050 on the Euro.
There were reports that the US was planning to impose tariffs on a further EUR3.1bn worth of goods which undermined sentiment and triggered a sharp decline in equity markets.
US Chicago Federal Reserve (Fed) President Evans stated that no-one at the Fed is thinking about negative interest rates which provided an element of dollar support and the US currency secured defensive demand as risk appetite deteriorated.
Equity markets moved lower and the dollar secured fresh support with the Euro against the USD fell below the 1.1300 level. The US currency continued to gain ground in US trading with the commodity currencies retreating sharply and the Euro dipped to the 1.1250 area. The dollar maintained a firm tone this morning with the Euro slightly weaker.
French June business confidence strengthened to 77 from 71 previously, although this was slightly below consensus forecasts. The German June IFO business confidence index strengthened to 86.2 for June from 79.7 the previous month and above consensus forecasts of 85.0. There was a small improvement in the current conditions component and a stronger rebound in the expectations component to 91.4 from 80.5 previously. Conditions remain very tough in the engineering sector, but export expectations have improved significantly and there is likely to be growth of around 7% from the third quarter. ECB chief economist Lane stated that evidence tilts towards asset purchases being the most efficient tool in current circumstances which suggests opposition to any further cut in interest rates.
After holding firm in early Europe, the common currency dipped ahead of the US open as risk appetite deteriorated again. Markets continue to monitor progress towards an EU recovery fund with German Chancellor Merkel due to meet French President Macron next week.
As of writing, the Euro trades around the 1.1240 against its US counterpart.
Data to watch
11:30 – EUR – ECB Monetary Policy Meeting Accounts
12:30 – USD – Core Durable Goods Order
12:30 – USD – Durable Goods Order
12:30 – USD – Final GDP
12:30 – USD – Unemployment Claims
20:30 – USD – Bank Stress Test Results