Dollar index strengthened to 27-month highs.

Trading volumes were subdued during Monday with US markets closed for the Labor Day holiday.

The dollar index strengthened to 27-month highs amid a lack of confidence in European currencies and little support for commodity currencies.

Sterling was damaged by weak manufacturing data and intense political uncertainty with further GBP/USD losses on Tuesday to fresh 2-year lows.

Equity markets were little changed amid indecision with buying limited by reports that the US and China were struggling to fix a date for trade talks.

Oil prices retreated as higher OPEC output and dollar gains curbed support.

Precious metals were also hampered by dollar strength, but again resilient amid underlying demand for defensive assets.

Although there were no significant positive dollar developments, the US currency continued to gain by default given a lack of confidence in other major currencies. In this context, the dollar pushed to fresh 2-year highs on Tuesday with EUR/USD also declining to fresh 2-year lows near 1.0930 as political concerns contributed to a lack of confidence.

The UK August PMI manufacturing index declined to an 85-month low of 47.4 from 48.0 the previous month and below consensus forecasts. There was the sharpest rate of decline in new orders since July 2012 with exports orders under pressure and business sentiment also declined sharply to record lows. Sterling had already weakened into the data and remained under pressure following the release as confidence in the economic outlook weakened further.

When the House of Commons returns from recess on Tuesday, opposition parties will table a motion to force the government to request a further 3-month Brexit extension if there is no resolution by late October. Government sources indicated that the vote would be considered a confidence vote as pressure on potential rebel Conservative MPs continued to increase.

After persistent rumours of a General Election before October 31st Prime Minister Johnson warned that there would be an election if the government lost Tuesday’s vote as political uncertainty and tensions continued to intensify. GBP/USD declined to below 1.2050 while GBP/EUR fell to support below the 1.0975 level.

BRC retail sales data was weak with an annual 0.5% August decline. Sterling weakened further in early Europe on Tuesday as GBP/USD hit fresh 2-year lows and briefly traded below 1.2000 with high volatility inevitable during the day.

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