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Rising US virus cases damage risk appetite

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30 June 2020

Written by
Matthew Ryan

Senior Market Analyst at Ebury. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

FX markets were buffeted in both directions as trading opened for the week yesterday, with ongoing uncertainty surrounding COVID offsetting recent improvements in economic data.

rguably the main talking point in financial markets in the past few weeks has been the sharp move higher in US virus cases that are now surpassing the daily peaks reached during the height of the pandemic in April. A number of US states that have been worst hit are now reimposing lockdown measures, which raises concerns over the prospect of a potential ‘V-shaped’ recovery in the US economy.

On the other hand, economic data out of the main areas has been largely impressive, notably last week’s European PMIs and US durable goods orders. The result has been a general unwinding of safe-haven flows, albeit to a more modest extent than the impressive data would necessarily warrant.

Powell rebuffs calls for more US interest rate cuts

Brexit concerns continue to weigh on the pound

Sterling was on the defensive on Monday, falling against both the dollar and the euro during the course of London trading.

A rally in the currency amid hopes that the UK government was planning to ramp up infrastructure spending to help support the economy proved short-lived. The subsequent move lower in the pound can be attributed largely to ongoing uncertainty surrounding the UK’s future relationship with the European Union, particularly after PM Johnson struck another hard-line stance on the Brexit negotiations on saturday.

Meanwhile, this morning’s first quarter GDP data was revised downwards from the initial estimate, with the UK economy shrinking by 2.2% in Q1 versus the -2% estimate. This does, however, run on a significant lag and mostly covers the period pre-lockdown, hence it was largely ignored by currency traders. Next up will be the revised manufacturing and services PMI data out on Wednesday and Friday respectively.

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Euro heads back towards 1.12 level

The euro had a strange day on Monday, briefly looking as though it would break through the 1.13 level before sliding back towards 1.12 versus the US dollar. The recent sharp divergence in new COVID-19 cases between the US and Euro Area has not yet been reflected in a materially stronger euro, largely we think due to the safe-havens flows that the news has triggered.

June inflation data out of the Euro Area this morning is expected to show the limited upward pressure on prices present in the global economy. This week is actually a very busy one on the macroeconomic data front. European PMI data may receive some attention, as will Wednesday US PMIs and FOMC meeting minutes. The big one will, however, be this Thursday’s US labour report for June, brought forward 24 hours due to the Independence Day holiday. Investors are eying another positive month of job gains as the US economy gradually begins unwinding its lockdown measures.