Risk sentiment made only a modest recovery in European trading on Wednesday as markets remain spooked by the Brexit aftershocks. The pound managed to rebound strongly against the dollar to reclaim the 1.30 level but was struggling to hold above 1.29 dollars by late European session. Earlier today, the pound fell to a fresh 21-year low as concerns over the impact of Brexit on the UK economy were heightened.
The euro also came under pressure but its decline was more limited and had recovered to 1.1068 dollars in late European trading.
The Japanese yen was the main winner of the day as it soared 1.5% against the pound at 130.50, having earlier pushed the pound to its lowest since late 2012. Euro/yen was another casualty as it slid 0.7% to 111.80 yen.
The dollar also fell against the yen, though it was broadly firmer against a basket of major currencies. The greenback hit a 1½-week low of 100.92 yen in mid-European session before reversing to climb back above 101 yen in late session.
The US currency was boosted by small upward revision to the Markit services PMI from 51.3 to 51.4 in June’s final reading. But more significantly, the closely watched ISM PMI for non-manufacturing activity strongly beat estimates in June.
The IS non-manufacturing PMI rose from 52.9 in May to 56.5 in June – the highest since November 2015. Expectations were for a smaller increase to 53.3. In a further encouraging sign for the US economy, the survey’s most other components also rose, including employment, but the price paid index was slightly weaker.
In other data for the US, the country’s trade deficit missed estimates to widen to $41.1 billion in May from $37.4 billion in April. Canada’s trade figures also disappointed, as the trade deficit rose to a near record of C$3.28 billion in May.
The data added further pressure on the Canadian dollar, which is already being weighed down by a drop in crude oil prices. USD/CAD rose to a one-week high of 1.3047 in late European trading.
Crude oil prices headed lower for a second day on Wednesday as worries about the impact of Brexit on demand hurt sentiment for the commodity. US light crude was down 1% at just above $46 a barrel, having earlier dropped below that level.
European equities were also dragged lower, with most major European indices dropping by around 2%, but gold continued to benefit from the risk-off trading to climb to a new high for 2016. The yellow metal hit a 2¼-year high of $1375 an ounce before easing slightly.
Sweden’s central bank, the Riksbank kept its repo rate unchanged at -0.50% at its policy meeting on Wednesday. The decision was widely expected but the Swedish krona fell after the central bank said it now expects a longer delay until the repo rate starts to be raised, citing Brexit as the main reason. The dollar was up 0.5% against the krona at 8.5621 and the euro was 0.3% firmer at 9.4637.
Looking ahead to the remainder of the day, the Fed’s minutes for the June FOMC minutes are expected to be published at 18:00 GMT. The minutes pre-date the Brexit referendum so will be seen as less relevant now, but they should still shed more light on the Fed’s latest assessment of the US economy.
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