Fed Chair Powell continued to express opposition to negative interest rates and was notably cautious over the economic outlook.

Fed Chair Powell continued to express opposition to negative interest rates and was notably cautious over the economic outlook.

The US dollar regained ground after Powell’s comments on negative rates. The dollar also gained defensive support as risk appetite deteriorated and fears over the longer-term outlook increased.

From highs near 1.0900, EUR/USD retreated to near 1.0800 and remained on the defensive on Thursday.

Sterling remained under pressure amid underlying economic fears with GBP/USD near 1.2200. Commodity currencies retreated significantly with Australian dollar losses compounded by very heavy job losses for April.

Ahead of the New York open, Germany announced that all borders with France, Switzerland and Austria would be opened after May 15th, although this is likely to be for inward travel only and wider EU external border controls will remain in place until June 15th.  Expectations of a gradual easing in restrictions provided an element of Euro support, but Euro-zone industrial production declined 11.3% for March and the near-term outlook remains bleak.

ECB vice-president de Guindos stated that the economy has hit the bottom in terms of contraction, but that it would take 2 years to recover fully.

The Euro maintained a firm tone ahead of the New York open and EUR/USD strengthened to highs near 1.0900 on speculation over dovish rhetoric from Fed Chair Powell.

In his interview on Wednesday, Powell reiterated that the Fed committee remained opposed to the use of negative interest rates, especially given potential adverse effects on the banking sector. As far as the economy is concerned, Powell stated that further support may be needed given the depth of the downturn. He also stated that there was a sense within the Fed that the economic recovery would be slower than expected. Following his comments, there were further underlying concerns over the US recovery path and persistent weakness.

The rejection of negative interest rates did, however, underpin the dollar and the US currency also gained an element of defensive support with the Euro initially weakening to the 1.0850 area. The dollar continued to gain defensive support later in US trading with EUR/GBP dipping to below 1.0820 as commodity currencies weakened and the pair was held fractionally above 1.0800 in early Europe on Thursday as underlying US currency demand held firm.

The April US Federal budget deficit increased to $737.9bn for April amid a huge increase in spending and slide in tax revenue. The deficit was close to market expectations and for the first seven months of the fiscal year, the deficit increased to $1.48trn from $530.0bn last year. US producer prices declined 0.3% for March with a 1.2% year-on-year decline compared with expectations of a 0.2% increase, maintaining deflation fears, although core prices increased 0.6% over the year.

The dollar lost ground early in US trading with a USD/JPY retreat to 106.70. The Japanese currency was unable to secure sustained support despite a more defensive risk tone and USD/JPY recovered to the 107.00 area. US equities retreated sharply later in the session, although the dollar held steady.

Bank of Japan Governor Kuroda stated that the central bank can expand asset purchases further and cut interest rates if needed. Overall risk appetite remained fragile on Thursday with concerns that the global economy would be slow to recover and Chinese data will be watched closely on Friday for evidence of trends in the domestic economy. Overall, USD/JPY retreated to near 106.80 as the yen secured renewed net gains on the crosses.

Overall confidence in the UK outlook remained fragile despite evidence that consumer spending had recovered slightly during the second half of April. In its latest projections, the NIESR forecast that the economy was likely to shrink at a year-on-year rate of between 25-30% for the second quarter with their current estimate for a decline of 28.3%. There were also underlying concerns over the fiscal situation with leaked documents indicating a base-line deficit of £337bn for the current fiscal year.

Overall Sterling sentiment remained negative with a combination of political and economic fears as the government faced persistent criticism of its coronavirus policies. GBP/USD briefly recovered to above 1.2300 before sliding to below 1.2250 as GBP/EUR weakened to fresh 12-week lows below 1.1270.

The RICS housing index declined to -21 from 9 previously with extremely weak activity and the market effectively closed.  Bank of England Governor Bailey warned over the outlook and there were strong hints that the bank would expand quantitative easing further. He also stated that the bank was ready to help finance government spending to ease potential austerity measures which indicated potential debt monetisation and will tend to unsettle markets as the economic cost escalates.

Economic Calendar