Global markets started the week with moderate optimism thanks to positive news flow related to re-opening of economies, increasing consumer mobility and lifting of related caps on consumption. News about gradual return of Europe and some US states to their normal economic rhythm somewhat neutralize dismal reports from the economic front.
The spurt in risk assets is also supported by oil prices as their robust growth prompts upbeat adjustments of inflation expectations, key gauge of an economic rebound. Relatively expensive crude oil compared to recent period of low prices helped commodity currencies to lead within the G10 group, although their bullish momentum grows fragile due to risk of oil downside correction. The demand for risk assets is now also constrained by emerging risk of re-escalation of the trade spat between the United States and China due to Trump attempts of scapegoating. The size of long-term economic damage from lockdowns on firms remains unclear, however, for risk assets this risk will be likely negative. Regarding foreign exchange market, limited room for risk-on moves provide solid foundation for stronger USD, with DXY likely staying above 100 mark.
The European currency continued to hover around 1.08 mark on Monday. The easing of sanitary restrictions in one of the epicenters of the Covid-19 outbreak in Europe, Italy, indicates that lockdowns for Europe is largely a past issue. Markets’ focus shifts to consumer spending data in order to understand whether there have been changes in consumer habits and what is the impact of social measures distancing on them. EURUSD is expected to continue to fluctuate in the range of 1.08-1.09 for all this week.
For the pound, support at 1.20 looks fragile thanks to a series of comments by British Central Bank officials who shed light on the future of the UK’s monetary policy. The chief economist of the Bank Haldane hinted in an interview that negative interest rates (on the reserves of commercial banks in the Central Bank) could be added to the bank tools, in addition, recent comments by the head of Bank Bailey indicated an increase in the likelihood of QE expansion in June. The current pound valuation may also not fully capture the risk of Brexit negotiation breakdown, similarly to breakdown of the trade deal between the US and China. The target for the pair is a test of 1.19 mark.
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