FX Daily: Negatives pile up for sterling

Global markets have started the week on a fairly optimistic note, likely welcoming the acceleration in reopening plans in western economies, which appear to be settling with a calculated risk of second waves. Oil continues to recover, allowing the commodity bloc to lead the G10 during the Asian session. This mildly optimistic stance is set to be challenged by rising US-China tensions (US officials insisted on blaming China for the pandemic over the weekend) along with doubts about the effective ability of major economies to restart after lockdown measures are eased. In our view, a good deal of caution may still keep risk-on rallies relatively short-lived for now. In FX, this should translate into keeping the dollar supported this week. A slew of data from the US will not be particularly intense as markets will mostly focus on Thursday’s jobless claims (possibly, below 2.5M) and housing numbers. But as data continues to show the depth of the recession in the US, the dollar is hardly suffering from fading US economic exceptionalism. DXY should consolidate above 100. More on our FX views for the week in “G10 FX Week Ahead: Bad data vs King Dollar”.

The Italian government has allowed most businesses to reopen today and pledged to reopen its borders to tourists on 3 June, in line with most EU countries. This is arguably good news for the euro, although the currency still seems to be lacking enough positive catalysts to stage a decisive recovery just yet. EUR/USD may find itself stuck around the 1.08 area for most of the week.

As highlighted in “GBP: Market too complacent on transition risk,” there were numerous indications last week that the markets were underpricing the downside risk to sterling from the Brexit transition period coming to an end this year. The risk of additional pound sell-offs in the near future appear quite material. Adding to the gloomy GBP short-term outlook, the Bank of England's Chief Economist Andy Haldane hinted during an interview that negative rates may be in the monetary policy committee's toolkit. Remarks by BoE’s Silvana Tenreyro will be closely watched today. We remain sceptical about the BoE venturing into negative rates, but investors’ high sensitivity to the subject likely warrants additional near-term downside risk for sterling. 1.20 appears as an increasingly fragile support for cable.

The rouble should start the week on the front foot as oil prices continue to edge higher. We have recently upgraded our short-term view on RUB. As per “Russia: RUB stabilised on portfolio flows and FX interventions”, FX intervention and capital inflows in April should have mitigated the fallout from the oil slump, and our economists now expect a lower trading range (73-78) in 2Q20 for USD/RUB.