(15 MAY 2020)DAILY MARKET BRIEF 2:US dollar index consolidates above the 100

In the foreign exchange markets, the US dollar index consolidates above the 100 mark on firm safe haven demand. The US treasury yields retreat as investors continue piling into less risky US debt, despite the uptick in equities – a proof that the risk appetite remains brittle.

The EURUSD extended losses to 1.0775 on Thursday and remained offered near the 1.08 mark in Asia. The strong US dollar and uncertainties regarding the European Central Bank’s (ECB) firepower weigh on the euro demand. Today, the Eurogroup meeting will lean on the progress over the second amendment adopted on 8 May 2020 to extend the scope of the state aid temporary framework, where countries will be given access to a credit line to finance their coronavirus-ballooned deficit. But the amount of lending remains quite limited, to maximum 2% of the member states’ GDP. So even a good progress on the fiscal leg may not replace the ECB support, if the bank finds its intervention capacity paralyzed by the German opposition. Hence, the prospects of scarce fiscal and monetary support could further weigh on the European assets and the euro.

Across the Channel, the pound bounced back to the 1.22 mark after having tested the April support of 1.2170 on Thursday. The sterling outlook remains negative as the latest round of Brexit negotiations this week didn’t show any signs of progress in key areas. But the clock is ticking louder to the critical June 2nd deadline and the chances of seeing a deal remain slim. Therefore, the increased pricing of a no-deal Brexit should further weigh on the pound and encourage a further retreat toward the 1.20 level, and possibly below against the greenback.