Conditions were boosted substantially by the Fed announcement of direct corporate bond buying in the secondary market.

Risk appetite initially remained fragile on Monday before gradually regaining some poise.

Conditions were then boosted substantially by the Fed announcement of direct corporate bond buying in the secondary market. US equity markets secured strong gains and Asian bourses also posted notable gains.

The dollar had already drifted lower and then declined further following the Fed move with EUR/USD posting significant gains to near 1.1350. The Bank of Japan expanded lending with the yen losing ground on the crosses.

Sterling recovered ground with GBP/USD trading above 1.2600 on gains in risk appetite with a measured response to labour-market data.

The German Finance Ministry reported that the budget deficit was likely to be around 7.25% of GDP this year and the Euro was initially held in narrow ranges.

The New York Empire manufacturing index recovered strongly to a 4-month high of -0.2 from -48.5 previously and above consensus forecasts of -30.0. There was a strong recovery in the new orders index, although unfilled orders continued to decline at a significant pace. Employment declined at a slower pace while the workweek continued to decline. There was a sharp improvement in the six-month outlook to a 10-year high.

Kansas City Fed President George stated that it was worth considering more fiscal stimulus to aid the recovery while Dallas President Kaplan stated that most forces will be deflationary over the next two years. EUR/USD was able to find support above Friday’s lows near 1.1220 and gradually gained ground to trade near 1.1280 as equity markets pared losses and the US dollar lost defensive support. There were further hopes that the EU would agree a recovery plan this week.

After the European close, the Federal Reserve announced that it would start buying corporate bonds directly rather than through Exchange Traded funds. It also stated that it would buy bonds directly from issuers in the near future. This announcement triggered fresh equity buying and a further decline in dollar demand which pushed EUR/USD above 1.1300. The US currency continued to lose ground on Tuesday and commodity currencies strengthened with a EUR/USD peak near 1.1340.

Ahead of the New York open there were comments from Beijing Commerce Ministry that China’s foreign trade faces increasing uncertainties, together with complex and severe risks as well as challenges in 2020 which reinforced market caution surrounding risk conditions. Beijing also announced that plans to re-open entertainment venues had been halted.

Equity markets regained some ground, however, which limited potential defensive yen demand and the dollar was able to resist losses without being able to make any headway. The Japanese currency weakened further as equity markets strengthened after the Fed’s announcement of increased bond buying.

The Bank of Japan held interest rates at -0.1% and continued to target levels around 0% for the 10-year bond yield. The bank announced an increase in the special coronavirus lending programme to JPY110trn from JPY75trn and also stated that the economy was in an increasingly severe state.

Equity markets continued to gain strongly and tended to overshadow on-going concerns over the Beijing coronavirus situation. With demand for the dollar and yen both weaker, USD/JPY settled around 107.50 with net yen losses on the main crosses.

According to the EU Commission, parties noted the UK’s decision not to request an extension of the transition period and it will end of December 31st 2020. There were generally upbeat comments from EU Commission head Von der Leyen and talks will be intensified, but underlying caution over trade issues persisted.

Sterling came under renewed pressure in early Europe amid the fragile risk tone, but it gradually regained ground as equity markets pared losses. The GBP/USD recovery back above 1.2500 and  GBP/EUR rallied towards 1.1170 level underpinning UK currency demand.

Sterling made further gains in Asia on Tuesday with a GBP/USD move above 1.2650. The UK unemployment rate held at 3.9% in the three months to April, below market expectations of 4.7% and employment posted a slight gain. There was, however, a further surge in unemployment jobless claims of 528,000 following an increase of 857,000 previously and above market expectations of around 400,000 and the total number of hours worked declined sharply.

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