Overall risk appetite held firm on Friday, but with a significant setback in Asia on Monday.

Business confidence data was mixed with strong US manufacturing data offset by a retreat in services.

Overall risk appetite held firm on Friday, but with a significant setback in Asia on Monday amid a slide in the Chinese education sector. US bond yields were little changed before a fresh retreat on Monday. After record highs on Friday, Wall Street equity futures also lost ground on Monday.

CTFC data recorded a long non-commercial dollar position for the first time since March 2020. The dollar overall held a firm overall tone against major currencies amid less confident risk conditions. EUR/USD was little changed with the yen gaining some support. Sterling overall edged lower with risk conditions tending to dominate. Commodity currencies were mixed, but lost some ground on Monday.

The French PMI business confidence data was weaker than expected with the July flash manufacturing index declining to 58.1 from 59.0 previously. The German data, however, was above expectations with the manufacturing index strengthening to 65.6 from 65.1 while the services index posted a stronger advance to 62.2 from 57.5.

The Euro-zone manufacturing index edged lower to 62.6 from 63.4, but slightly above expectations while the services sector advanced to 60.4 from 58.3 and above consensus forecasts of 59.5. There were further supply-side constraints while input costs increased at the fastest rate since at least 1997.

The latest survey of professional forecasters recorded an increase in the 2021 inflation rate projection to 1.9% from 1.6% with the 2022 forecast raised to 1.5% from 1.3%. All figures were still significantly below the ECB’s new inflation target. The data overall failed to provide any impetus to the Euro, although tight ranges prevailed.

The US PMI data was mixed with an increase in the manufacturing index to 63.1 from 62.1 previously and above consensus forecasts, but there was a dip in the services-sector index to a 5-month low of 59.8 from 64.8 and below market expectations. There were further increases in employment for the month while cost pressure eased only slightly. The market impact was limited with the dollar holding firm despite the weaker services-sector data and EUR/USD settled around 1.1770.

CFTC data recorded a decline in long Euro positions in the latest week to below 46,000 contracts from near 60,000 previously. This was the lowest figure since March 2020 and speculators overall switched to a long dollar position for the first time since March 2020. This will reduce the potential for further short covering and the dollar was mixed on Monday.

EUR/USD traded around 1.1780 defensive fragile risk conditions and there will be an element of caution ahead of Wednesday’s Fed meeting.

Yen demand remained weaker ahead of Friday’s New York open with the dollar posting net gains to 110.50 as the Euro tested the 130.00 level.  US equities made further headway during the day with the S&P 500 index testing record highs while the 10-year yield closed little changed around 1.28%.

CFTC data continued to indicate extensive short yen positions, maintaining the potential for short covering, potentially limiting the scope for dollar gains.

US talks on an infrastructure deal continued over the weekend, but there was still substantial disagreement.

According to flash data, Japan’s PMI manufacturing index edged lower to 52.2 for July from 52.4 while the services sector declined to 46.4 from 48.0, the 18th successive month of contraction. Companies overall were slightly more optimistic over the outlook.

US equity futures edged lower as China commented that relations with the US remained difficult and at a stalemate which hampered risk appetite and triggered renewed yen demand on defensive grounds as Chinese markets dipped sharply. USD/JPY retreated to around 110.30 while EUR/JPY tested support below 130.00.

The UK manufacturing PMI index declined to a 4-month low of 60.4 from 63.9 the previous month and below consensus forecasts of 62.7. The services sector index also retreated to a 4-month low of 57.8 from 62.4 previously and below expectations of 62.0. There was mixed evidence surrounding business confidence while recruitment difficulties were significant in hampering growth. Costs increased at the fastest rate since at least 1998 while the manufacturing sector was again hampered by severe supply-side issues. Companies were still optimistic over the overall outlook, but there were still important reservations over logistics difficulties.

From lows around 1.3720 GBP/USD rallied to highs around 1.3770 before settling just below 1.3750 while GBP/EUR settled around 1.1675.

CFTC data recorded a switch to a net short, non-commercial position of over 3,000 contracts in the latest week from a long position of 8,000 previously. This was the first short Sterling position since mid-December 2020. There was some relief that the latest data recorded a further decline in UK new coronavirus cases, but risk appetite was slightly weaker on Monday GBP/USD little changed just below 1.3750 while GBP/EUR traded around 1.1675.

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