Risk appetite was boosted by the EU recovery fund as well as optimism over the potential for a coronavirus vaccine.

Risk appetite was boosted by the EU recovery fund as well as optimism over the potential for a coronavirus vaccine.

Global equity markets made significant gains, despite a retreat in the Nasdaq index. Sentiment was slightly more fragile in Asia on Wednesday amid US coronavirus and fiscal uncertainties.

The Euro posted strong gains on the day as single-currency sentiment strengthened. The dollar lost ground as defensive currency demand faded and fundamental reservations increased amid deficit fears. Overall, EUR/USD strengthened to 18-month highs near 1.1550 before correcting slightly.

Sterling was supported by the strong tone surrounding risk appetite, but the impact was offset by trade concerns with EUR/GBP gains.  Commodity currencies posted sharp gains during the day with AUD/USD at 15-month highs.

Following overnight agreement to approve the EU Recovery fund, overall Euro sentiment remained stronger during Tuesday. From a longer-term perspective there were expectations of strong capital inflows, especially with a reduction in risk premiums on Euro assets and reservations over the US outlook.

Italian bond yields declined to the lowest level since early 2020 which also helped underpin sentiment and there were expectations of short-term fund inflows on momentum grounds if EUR/USD moved above the important 1.1500 level against the US currency.

There were no major US data releases during the day and Federal Reserve officials remained silent ahead of next week’s policy meeting.

The Chicago Fed national activity index increased to 4.1 for June from 3.5 the previous month with strong contributions from production and employment, although there was a small negative contribution from the orders and sales index.

The Euro was initially unable to make headway with pressure for a correction and profit taking having a significant impact. The single currency, however, gained fresh support in New York and the dollar was also exposed to notable selling pressure as defensive demand continued to wane and concerns over US fundamentals increased. In particular, there were concerns over the US twin deficits and risk of a fresh slowdown with the dollar index at 4-month lows.

The dollar was also undermined by fresh demand for commodity currencies and EUR/USD broke above the 1.1500 level for the first time since January 2019. Overall, the pair strengthened to highs near 1.1550 before correcting slightly while the US dollar remained firmly on the defensive.

Overall risk appetite held firm on Tuesday with global sentiment boosted by the EU recovery fund. The dollar initially held firm with limited yen demand, but with limited gains. USD/JPY dipped below 107.00 in US trading amid wider losses and the Japanese currency also secured an element of protection from a further sharp advance in precious metals. The yen was seen as a better potential store of longer-term value than the US currency and US yields drifted lower.

The US registered a daily death toll of just over 1,000 for Tuesday, the highest figure since early June with the number of new cases at above 68,000. Markets continued to monitor fiscal-policy developments with the current unemployment insurance support package due to expire at the end of July.

The decision to push Shelton’s nomination as Fed Governor to a full Senate vote also had some impact in undermining the dollar. Japan’s flash manufacturing PMI index recovered slightly to 42.6 from 40.1 previously. Asian equity markets were mixed with a slightly more cautious tone and USD/JPY traded around 106.85 and near to 4-week lows.

Global risk conditions continued to have an important positive impact on Sterling during Tuesday as international influences dominated the UK currency moves. There were still important reservations over the trade outlook with fears that there would be no short-term progress. The EU has been focussed on securing agreement for the recovery fund and there will still be very little political energy from the EU side in the short term.

Sterling was still able to make firm gains with a GBP/USD break above the 1.2670 area contributing to fresh buying interest. As the US currency came under wider selling pressure, GBP/USD broke above the 1.2700 level. GBP/EUR also dipped to test the 1.1300 level before finding support.

Underlying fundamental reservations over UK fundamentals continued with a particular focus on trade. There were reports that the UK government had abandoned hopes of reaching a trade deal with the US before November’s presidential election and there were also reports that EU talks were close to collapse.

Economic Calendar

Expected Previous
12:00 USD MBA Mortgage Applications - 5.10%
13:30 CAD CPI (Y/Y)(JUN) - -0.40%
13:30 CAD CPI (M/M)(JUN) - 0.30%
13:30 Bank of Canada Core CPI (Y/Y)(JUN) - 0.70%
13:30 Bank of Canada Core CPI (M/M)(JUN) - -0.10%
14:00 US House Price Index (M/M)(MAY) - 0.20%
15:00 USD Existing Home Sales(JUN) - 3.91M
15:00 USD Existing Home Sales Change(JUN) - -9.70%
15:30 USD Crude Oil Inventories -1.950M -7.493M
16:00 ECB Luis De Guindos Speaks - -

*All rates shown are indicative of interbank rates and should only be used for indication purposes only. It is important to note that foreign exchange rates fluctuate and that rates may vary depending on the amount and the base currency that is purchased or sold. Rates are correct as of 8:00am UK time. CentralFX are not responsible for the rates shown.