EUR / USD
There were no significant Euro-zone data releases on Monday with political developments and global equity market trends crucial for overall dollar direction. There was an element of Euro caution ahead of the EU Summit which will start on Friday with the recovery fund the main area of focus.
In comments on Monday German Chancellor Merkel stated that Italy and Germany had agreed on the basic structure of the recovery fund, but she was unable to say whether the agreement would be reached on the budget and recovery fund at this week’s Summit. Markets will continue to monitor rhetoric closely over the next few days.
The dollar briefly regained some ground ahead of the New York Open, but then lost ground once again as the strength in global equities continued to undermine support for the US currency. Commodity currencies made further gains initially which stifled support for the US currency.
There were fresh concerns over the US economic outlook with further evidence that overall gasoline demand was weakening again from the recovery peak seen in June. The budget deficit also increased to a record $864bn for June, reinforcing the substantial fiscal deterioration amid a slide in receipts.
After a brief dip, the Euro strengthened to above 1.1350 against the vulnerable dollar with a peak 1.1375 before a retreat as the US currency regained ground amid a reversal in US equity markets. Risk conditions remained slightly more fragile on Tuesday with the dollar just below 1.1350 as market caution prevailed.
The Japanese government stated that there was no need to declare another state of emergency declaration at this stage which had little overall yen impact.
Markets will be monitoring the latest US earnings data which will start this week. US equities continued to advance ahead of the New York open and there was a significant dip in the Japanese yen as defensive demand for the currency faded with the dollar strengthening to the 107.30 area.
There was a slowdown in new coronavirus for Florida and Arizona on the day which provided an element of relief. There was, however, very choppy trading in the Nasdaq index with a sharp intra-day reversal in Tesla and other major tech stocks undermining the overall index. These losses also had an impact in undermining wider risk sentiment as overall equity markets retreated. There were sharp losses late in the session with sentiment undermined further by California’s decision to close indoor activities in bars and restaurants to control the coronavirus outbreak. The dollar held broadly steady as the yen failed to secure defensive support.
In yuan terms, Chinese exports increased 4.3% in the year to June compared with expectations of 3.5% and imports posted a 6.2% gain compared with expectations of a 4.7% decline which provided some relief. Overall risk appetite was cautious, especially with further US-China political stresses and the dollar settled around 107.25.
Sterling held a firm tone in early Europe, but failed to hold the gains with further selling after it failed to break above the 1.2670 area against the dollar. Bank of England Governor Bailey stated that the bank is seeing the economy come back somewhat, but there is a long way to go and the bank is very worried about jobs.
Sterling gained initial support from the strong tone in global risk appetite, but it failed to sustain the advance and lost ground during the day. Markets fretted over the huge amount of Brexit preparation needed over the next few months with a very tight timetable. There were important concerns that UK trade would face notable disruption from the end of this year even if a trade deal was put in place with the EU which hampered underlying sentiment.
Sterling was unable to hold gains against the dollar and retreated sharply to the 1.2550 area as risk appetite dipped while the Euro strengthened to above 0.9000 to 0.9035. BRC data recorded an annual increase in like-for-like retail sales of 10.9% from 7.9% previously. GDP increased 1.8% for May following the April slump of 20.4%, but this was well below market expectations of 5.0%, reinforcing concerns over a weak underlying recovery profile. Manufacturing production recovered more strongly, but Sterling overall was unimpressed by the data as it traded just below 1.2550 against the dollar and the Euro held around 0.9040.
Swiss sight deposits increased to CHF688.6bn for the latest week from CHF687bn the previous week which suggests that the National Bank did intervene in the FX market in the latest week, but not to the extent seen during the second quarter.
There was a dip in defensive franc demand as equities made further gains with the Euro posting significant gains to the 1.0700 area before a slight correction. The dollar edged above the 0.9400 level amid a wider recovery. The Swiss franc was unable to secure further net gains despite a dip in equities with the Euro around 1.0685.