Lack of conviction during Monday with narrow ranges prevailing as markets monitored coronavirus developments.

There was a lack of conviction during Monday with narrow ranges prevailing as markets monitored coronavirus developments. Reflation trades tended to lose support amid fresh reservations over the Chinese outlook with brittle risk sentiment.

There was a significant decline in US bond yields with the 10-year yield below 1.20%. Wall Street indices failed to sustain initial gains and edged lower. Asian markets lost ground as Chinese equities retreated again.

The dollar pared intra-day losses, but traded slightly weaker on the day. EUR/USD was held below 1.1900 in tight ranges. Sterling drifted lower during the day with GBP/USD just below 1.3900 amid a lack of interest from investment funds.

Commodity currencies retreated in New York amid coronavirus developments. The Australian dollar jumped higher after the Reserve Bank resisted a dovish shift.

The final Euro-zone PMI manufacturing reading for July was revised up to 62.8 from the flash reading of 62.6 even though the data releases for Spain for Italy were both below market expectations and also weaker on the month. Overall confidence in the manufacturing outlook held steady.

Narrow ranges prevailed ahead of the New York open with the Euro and dollar both unable to generate any momentum with EUR/USD capped below 1.1900.

The US PMI manufacturing index was revised higher to 63.4 from the flash reading of 63.1 with little impact.

The ISM manufacturing index declined to 59.5 for July from 60.6 the previous month and below consensus forecasts of 60.8. There was also a slight slowdown in the rate of growth in production and new orders while order backlogs were slightly higher.

After a marginal contraction the previous month, there was a limited net increase in employment for the month. Supply-side issues eased slightly on the month and prices also increased at a slightly slower rate, reinforcing speculation that overall inflation pressures could be in the process of peaking.

The dollar overall edged higher later in the New York session with EUR/USD settling around 1.1870, but with speculation that the global rebound was peaking.

Fed Governor Warner stated that inflation was well above the 2% target, but is expected to cool later this year and expectations are well anchored. There were, however, hawkish comments on the tapering issue as he noted that an announcement could be made in September if there are two more strong labour market reports with monthly job gains of close to 1 million per month. The comments increased expectations of a September announcement and emphasised the importance of this Friday’s jobs report.

The dollar was marginally weaker on Tuesday with EUR/USD around 1.1875 as markets continued to monitor global risk conditions.

The latest IMF study suggested that the US dollar was overvalued by around 8.2% in 2020 with a range of 5.2%-11.2%. Risk appetite held firm in Europe on Monday, although the yen was resilient. The dollar overall was unable to make any headway ahead of the New York open and the yen was able to post net gains with buying support gradually strengthening on the crosses. US 10-year bond yields declined to 10-day lows below 1.20% which continued to erode US dollar support.

Overall, USD/JPY dipped to lows around 109.25 around the European close with EUR/JPY retreating to around 129.80 and there was no recovery at the New York close.

Asian equities edged lower on Tuesday with the Chinese market undermined by another regulatory attack, this time on gaming stocks. US futures posted net gains, but the dollar was unable to regain ground with USD/JPY trading just below 109.20 and EUR/JPY around 129.75 as the yen maintained a firm tone on the crosses.

The final UK PMI manufacturing index was unchanged from the flash reading of 60.4 with little impact in currency markets. Sterling gained initial support from further merger-related activity which should lead to strong capital inflows, but it was unable to sustain the advance.

There was little positive impact from the initial gains in equity markets and the UK currency gradually lost ground with no immediate evidence that investment funds were looking to move back into the UK currency.  Markets continued to monitor delta-variant developments with a decline in the number of new cases.

From highs around 1.3930 there was a fresh GBP/USD retreat to below 1.3900 while EUR/GBP secured net gains to near 0.8550. There was a further GBP/EUR correction after failing to break the 1.1750 level and the UK currency was unable to regain territory.

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