EUR 

The euro pared its gains against the dollar yesterday after Federal Reserve Chair Jerome Powell stated in his speech that negative interest rates will not be part of the central bank’s toolkit to help revive the economy. This morning, EURUSD extended its losses despite the message from the European Central Bank Vice President Luis de Guindos in the online panel, where he stated that the economy has hit the bottom of the pandemic crisis as the eurozone economy is starting to gradually reopen. The ECB laid out multiple recovery scenarios, but Executive Board member Philip Lane stated that “all of our scenarios have… interruptions to economic life throughout the next year”. The key risk in assessing any productivity return to pre-virus levels lies in whether or not there will be a second COVID-19 wave, as IMF Chief Economist Gita Gopinath warned in the same online panel yesterday. While the recovery path is uncertain, the euro would certainly benefit from the joint opening of economies. The ongoing story about the ruling of the German Federal Constitutional Court against the ECB remains a downside risk to the currency, but Germany’s Chancellor Angela Merkel commented on this matter yesterday and told lawmakers in Berlin that she vows to defend the euro while respecting the Court’s ruling on the ECB’s asset purchase programme. Although Merkel’s comments were not followed by any significant market reaction, it does remove some of the extreme tail risk that Germany’s constitutional ruling would lead to a withdrawal of the Eurozone’s largest economy from the single currency. This morning’s calendar included inflation data from Germany, Spain and Italy and printed roughly in line with expectations for all three countries. Although the ECB’s economic bulletin painted a bleak picture for the single market’s economy, it didn’t add much to what markets already knew. With no other major releases scheduled for the rest of the day, the euro will be in the clutches of the US labour market data later this afternoon.

 

The dollar spent yesterday in the green against the whole G10 currency board except the Japanese yen after a warning from Federal Reserve Chair Jerome Powell that more stimulus will likely be needed in the US to combat the economic downturn induced by the pandemic. Powell acknowledged that a bumpy recovery is in store for the US, and urged for more fiscal stimulus in his speech. He stated that “at the Fed, we will continue to use our tools to their fullest until the crisis has passed and the economic recovery is well underway”, but also shed light on the negative interest rate talks that markets were holding their breath for after a series of FOMC members commented on their viability over the last few weeks. Powell rejected the idea of a negative interest rate policy and stated that all FOMC participants were against them, as evidence on the effectiveness of negative rates is very mixed. With fixed income markets toying with pricing in negative interest rate expectations, this theme will continue to be dominant for both the Fed and the dollar as additional US data points are released. 

After a brief interlude of dollar weakness yesterday afternoon, sterling once again found itself on the back foot against the greenback last night, while also weakening against the euro. Idiosyncratic factors probably had little to do with the general trend at play here: sterling’s losses against the US dollar since Tuesday are broadly consistent with its peers among the G10 currencies. Yesterday’s data included a sharp contraction in gross domestic product in the first quarter, despite only 9 days at the end of March being spent in full lockdown, while the National Institute of Economic and Social Research estimated that GDP would fall by around 25% in the second quarter. The Royal Institute of Chartered Surveyors released its latest Residential Market Survey, in which the balance of surveyors reporting a decline in prices fell to -21%. The release warned the balance could fall further into negative territory, and that the price expectations balance for the near term was -71%. Elsewhere, government plans to reduce tariffs on US agricultural imports reportedly caused friction between ministers. A large concession to the US was reportedly being planned by international trade secretary Liz Truss, opposed by Cabinet Office minister Michael Gove.