The euro appears to have turned a corner in the past 24 hours, rallying to just shy of the 1.10 level versus the US dollar yesterday afternoon.

A number of factors have been behind the move higher in the single currency this week, most notably news of a proposal between France and Germany for a EU common fund that would support smaller countries through the current crisis. This fund would provide around 500 billion euros of regional-wide fiscal support for those countries hardest hit by the pandemic, an encouraging sign of unity that has helped sentiment towards the euro.

Macroeconomic data has also tentatively begun to show signs of recovery. May’s ZEW economic sentiment index for the Eurozone leapt back up to 46, a marked improvement from the -49.5 registered in March. There now appears general optimism in the bloc that activity will begin the pick up pace in the coming weeks as new cases of the virus ease and economies begin to unwind lockdown measures.

Attention will now turn to this Thursday’s business activity PMI data for May, which is expected to show a rebound off April’s record lows. We are optimistic that the data could surprise to the upside, which may provide some additional impetus for the euro this week.

Powell cautious on recovery, UK inflation falls sharply

The dollar remained broadly on the back foot against most of its major peers on Tuesday, with positive news regarding progress towards a virus vaccine leading to an unwinding in safe-haven flows. Some rather cautious comments from Fed chair Jerome Powell were largely overlooked by the market. He stated that a full recovery in the US economy would not take place until the health crisis was resolved, stating again that both the Fed and the US government may need to provide additional support to carry households through the crisis.

While sterling has benefitted from the weaker dollar so far this week, its rally has been limited by the ongoing negativity surrounding the UK currency that has seen it be the worst performing G10 currency so far this month. Brexit headlines have once again reared their ugly head, with officials from both sides of the negotiations claiming that little progress had been made towards a full agreement. Should this continue to remain the case up until the end of June deadline to ask for an extension to the transition period, then additional losses could be on the cards for the pound, in our view.

Meanwhile, this morning’s UK inflation data slumped to just 0.8% in April from 1.5%, its lowest level since April 2016. This was, however, widely expected, with the lack of spending activity during the lockdown forcing retail outlets to slash prices at an aggressive pace. Next up will be a speech by BoE Governor Andrew Bailey later this afternoon.