EUR / USD
The Euro-zone Sentix investor confidence index recovered to -18.2 for July from -24.8 previously, although this was below consensus forecasts of -10.9 with some evidence of scepticism over the pace of recovery. A stronger yuan helped underpin the Euro against the US dollar as the Chinese currency strengthened to 3-month highs against the US currency. The single currency maintained a firm tone ahead of the New York open and hit 3-week highs near 1.1345 against the dollar.
The US PMI services-sector index was revised to 47.9 for the final reading from 37.5 the flash reading of 46.7 and 37.5 the previous month. The ISM non-manufacturing index strengthened sharply to 57.1 for June from 45.4 previously and well above market expectations of 50.2. This was the strongest reading since March and the largest monthly gain on record. The business activity index strengthened sharply to 66.0 from 41.0 and the new orders component also rebounded strongly on the month. There was only a small increase in order backlogs while employment continued to decline on the month. The overall components were slightly less encouraging that the headline figure. The dollar regained some ground following the data, although the Euro was able to hold above the 1.1300 level. Underlying trade tensions between the US and EU persisted with the EU reiterating that it would retaliate if the US pushes ahead with imposing tariffs on EU exports.
CFTC data recorded a net decline in long Euro positions from 2-year highs, slightly increasing the potential for fresh buying of confidence improves. The dollar remained subdued on Tuesday amid expectations of global recovery, but it was resistant to further losses with the Euro held around the 1.1300 level.
According to sources, the Bank of Japan is likely to maintain its current view of the economy at next week’s policy meeting. The bank is, however, also likely to warn that there are extremely high risks to the outlook, especially given the threat of a second wave of coronavirus infections while no policy changes are expected.
The dollar briefly made gains following the US ISM data but rallied quickly faded and the US currency retreated steadily later in New York. Atlanta Fed President Bostic stated that the US high-frequency data had shown a levelling-off of economic activity and the economic rebound may stall given the spike in coronavirus cases. Bostic also pointed to a high degree of uncertainty over the outlook and the expansionary Fed policy will inevitably continue.
US coronavirus developments were mixed with some moderation in Arizona, but there was an increase in the New Jersey infection rate. Texas also registered a record daily increase in cases, although there were potential distortions surrounding the weekend. Asian equity markets secured further gains on Tuesday, although momentum slowed after state-owned media urged investors to be rational. Japan’s household spending declined 16.2% in the year to May compared with estimates of an 11.8% decline. The dollar was held in tight ranges and found some support on dips to trade around 107.50 in early Europe although US futures moved lower.
The UK PMI construction index strengthened sharply to 55.3 for June from 28.9 the previous month which was the highest headline reading since July 2018 and well above consensus forecasts of 46.0. Overall confidence and new business increased marginally on the month, although there was still an important aspect of caution while employment declined further. There were a further issue with supply chains which was a contributory factor putting upward pressure on costs.
The data failed to inspire Sterling which was held in tight ranges. There was support from the firm tone in global risk appetite, but it was unable to make headway amid reservations over the underlying fundamental outlook, especially given tensions with China. Sterling was unable to hold above 1.2500 against the dollar and settled just below this level while the Euro held net gains to trade around 0.9060. There was little change in short positions in the latest week according to CFTC data as markets lacked conviction. Latest reports indicated that Chancellor Sunak would bring forward a stamp-duty holiday to take effect immediately in order to avoid damaging the housing market. Sterling again failed to hold above 1.2500 against the dollar on Tuesday with the Euro around 0.9050.
Swiss sight deposits increased to CHF687bn for the latest week from CHF683bn previously which suggested that the National Bank had engaged in significant intervention to restrain the Swiss currency during the week. The bank remains committed to curbing franc gains to combat deflation pressure.
The Euro was able to post limited net gains to around 1.0650 amid the firm underlying tone while the dollar lost further ground with 3-week lows below 0.9400 before a slight recovery. The Euro edged higher to 1.0665 on Tuesday as firmer global equities curbed potential defensive franc demand.