Risk appetite was fragile on Friday amid unease over US-China relations and the risk of a fresh US downturn amid the high level of coronavirus cases.

Risk appetite was fragile on Friday amid unease over US-China relations and the risk of a fresh US downturn amid the high level of coronavirus cases. US equity markets moved lower on Friday, although futures stabilised on Monday with marginal net gains in Asia.

Many assets classes contended with opposing influences of a weaker dollar and fragile risk conditions. The dollar remained under pressure amid a lack of confidence in US fundamentals with the dollar index sliding to 22-month lows on Monday.

EUR/USD posted 22-month highs near 1.1725 before a slight correction. Sterling was resilient despite trade concerns with GBP/USD making net gains to 4-month highs above 1.2800. Commodity currencies were hampered by weaker risk conditions, but there were net gains as US dollar losses dominated.

According to flash data, the German manufacturing PMI index strengthened to a 19-month high of 50.0 for July from 45.2 previously while the services-sector index advanced to a 30-month high of 56.7 from 47.3 as economic re-opening provided net support. The Euro-zone manufacturing index also posted a 19-month high of 51.1 from 47.4 while the services-sector index posted a 25-month high of 55.1 from 48.3. Orders also posted a net advance, although export orders were disappointing.

The US PMI manufacturing index strengthened to 51.3 from 49.8 previously, although this was slightly below consensus forecasts. The services-sector index advanced to 29.6 from 47.9, although this was below the 50.0 threshold and also below market expectations.

New home sales increased to an annual rate of 776,000 from 682,000 previously and above market expectations. The PMI data overall, however, maintained expectations that the Euro-zone recovery was stronger than in the US which provided underlying Euro support. The single currency was little changed into the New York open with no significant retreat and there were further gains in New York as the US currency came under renewed pressure with a net EUR/USD advance to near 1.1640.

CFTC data recorded a further increase in long non-commercial Euro positions to 125,000 contracts from 111,000 the previous week and the highest level since April 2018, maintaining the risk of a short-term correction if there is a shift in confidence and there were some concerns over the Italian fiscal situation.

Dollar sentiment, however, remain firmly negative on Monday with the US currency index at fresh 22-month lows as EUR/USD moved above 1.1700 to the highest level since September 2018. There was a peak near 1.1725 before a limited correction with underlying volatility liable to increase amid low trading volumes.

Global equities were firmly on the defensive during Friday amid unease over US-China tensions and concerns over the US profile amid congressional deadlock.

Fiscal policy will continue to be watched closely as wrangling over the next support package continued over the weekend with details of the Republican package set to be released on Monday. There will be proposals for a second round of stimulus checks to support demand, but there will be attempts to introduce means testing and some disruption is inevitable. There will be fears over the long-term budget trends which will tend to sap US currency support.

The dollar was unable to make any headway with an absence of defensive support again a significant feature. Overall yield support was also lacking which sapped US currency support. The dollar moved lower again following the US data releases and USD/JPY dipped to below the 106.00 level for the first time since the middle of March.

Japanese markets re-opened on Monday and the Bank of Japan maintained a cautious stance over the outlook. Asian equities were resilient and the US reported a slowdown in the number of new coronavirus cases. The dollar, however, remained under pressure with fresh 4-month USD/JPY lows near 105.50.

The July UK PMI manufacturing index strengthened to a 16-month high of 53.6 from 50.1 and above consensus forecasts of 52.0. The services-sector index strengthened to a 5-year high of 56.6 from 47.1 as the services-sector was gradually re-opened. The data overall maintained expectations of recover, but there were further concerns over labour-market trends with significant job losses reported, especially within services, maintaining recent evidence of labour-market vulnerability.

There was further underlying uncertainty over trade policy with mixed briefings after the latest round of talks. There was increased speculation that there would be a bare-bones agreement with negotiations continuing into next year. Sterling edged higher following the PMI data, although overall confidence in the outlook remained fragile.

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