EUR / USD
German retail sales declined 2.6% for June compared to expectations of a small increase with a year-on-year decline of 8.8%. The final reading for the July Euro-Zone PMI manufacturing index was revised slightly higher to 49.8 from 49.6, but both Spanish and Italian figures were in contraction territory for the month.
The Euro was supported by a decline in Italian yields during the day with yield spreads over German bunds declining to near 220 basis points from over 250 basis points last week. The dollar overall struggled to regain ground ahead of Monday’s New York open with Euro support close to 1.0200. Expectations of a less hawkish Fed policy stance undermined the dollar and there were limited net Euro gains.
Markets continued to monitor US economic trends given the importance for Fed policy expectations. The final US manufacturing PMI index was revised marginally lower to 52.2 from the flash reading of 52.3. Output edged lower and there was an easing of cost pressures on the month.
The US ISM manufacturing index edged lower to 52.8 for July from 53.0 previously, but slightly above consensus forecasts of 52.3. Production growth slowed while orders were in contraction territory for the second successive month. There was also a marginal contraction in employment for the third successive month.
The prices index declined to 60.0 from 78.5 previously which the fourth-largest monthly decline on record and the steepest fall since June 2010. This was also the lowest reading since September 2020. Although the data was slightly stronger than expected, the decline in cost pressures was the main focus within the survey.
The Euro advanced to highs around 1.0275 at the European close with the dollar at fresh 3-week lows before a slight correction as equities moved lower. The dollar remained generally on the defensive on Tuesday, but did recover from lows with the Euro around 1.0265 as yield trends remained a key influence.
The dollar was unable to regain significant traction ahead of Monday’s New York open. Treasuries rallied after the US ISM manufacturing data with the 10-year yield dipping to around 2.60% and the lowest reading for 16 weeks. There was also a sharp decline in oil prices on the day which reinforced the mood of optimism over underlying inflation trends. There was also a slight steepening of the yield curve inversion even though the 2-year yield dipped to just below 2.85%.
Lower yields were significant in undermining dollar support with further net losses and lows around 131.60 while the Euro also retreated to lows at 135.00.
The Chinese Beige Book on economic conditions warned that there was still an important underlying reluctance to invest as caution continued.
Political considerations were more important on Tuesday with important tensions surrounding Taiwan amid the planned visit by US House Speaker Pelosi. China continued to warn over negative consequences and risk conditions were brittle during the Asian session. US yields continued to decline with a dip to 16-week lows around 2.55% which undermined the dollar with 4-week lows below 130.50 before a slight recovery to 130.80.
The UK PMI manufacturing index for July was revised marginally lower to 52.1 from the flash reading of 52.2 and confirmed at a 25-month low. Overall business optimism also remained trapped close to 2-year lows. Output prices continued to increase, although the rate of increase was the slowest since May 2021.
The data had little impact with markets focusing on global trends and position adjustment ahead of Thursday’s Bank of England policy decision. There were further market expectations that the central bank would increase interest rates by 50 basis points this week and there was an element of short covering.
Overall risk appetite held firm amid optimism that global inflation pressures were peaking and this was important in underpinning the UK currency.
Sterling strengthened to highs near 1.2300 against the dollar while the Euro retreated to the 0.8370 area, although the mood was more cautious later in the day.
Reservations over risk appetite also limited Sterling support on Tuesday as it dipped below 1.2250 against the dollar while the Euro edged higher to 0.8385.
The Swiss franc edged lower on Monday as firm risk conditions dampened immediate demand for the Swiss currency. Lower Italian bond yields were also a significant element curbing any defensive support for the currency, although overall selling pressure remained limited.
The Euro edged higher to near 0.9750 while the dollar dipped just below the 0.9500 level. There was little net change on Tuesday with an element of caution ahead of Wednesday’s Swiss consumer prices data as a stronger than expected release could trigger further National Bank policy tightening.