Confidence in the US outlook remained fragile on Monday with further unease over coronavirus developments and congressional bickering over fiscal policy.

Confidence in the US outlook remained fragile on Monday with further unease over coronavirus developments and congressional bickering over fiscal policy.

The dollar remained under pressure on Monday with the currency index sliding to 25-month lows amid expectations of a dovish Fed policy before a limited correction on Tuesday.

EUR/USD strengthened to fresh 22-month highs around 1.1780 before a retracement. Risk appetite was slightly more cautious, but US equities posted gains amid expectations of strong monetary support.

Global equities struggled to make significant headway with recovery priced in. Sterling was boosted by dollar weakness as GBP/USD posted 3-month highs at 1.2900 before a correction amid the US dollar recovery attempt.

Commodity currencies made net gains on the back of US dollar weakness before a partial correction. USD/CHF corrected slightly from 5-year lows.

Dollar weakness helped trigger further demand for precious metals. Gold posted fresh record highs around $1,980 before correcting sharply.

The German IFO economic confidence index strengthened to 90.5 for July from 86.3 the previous month and was above consensus forecasts of 89.3. The current conditions component strengthened to 84.5 from 81.3, slightly below market forecasts, while the expectations index strengthened to 97.0 from 91.6.

Markets remained uneasy over the risk of coronavirus spikes within Europe, although overall single-currency sentiment held firm.

In its monthly report, the German Bundesbank stated that the economy declined sharply in the second quarter with the fastest rate of decline since at least 1970. The evidence suggest that the economy overall bottomed out in April while industry recovered from May. The bank expects that the economy will continue to recover during the second half of the year, especially in view of the fiscal stimulus and the weekly activity index has continued to show a net improvement in conditions.

US durable goods orders increased 7.3% for June after a revised 15.1% gain the previous month and marginally above consensus forecasts. Underlying orders increased 3.3%, slightly below market expectations. The Dallas Fed manufacturing index improved slightly to -3 for July from -6.1 the previous month. Expectations over the outlook remain strong, but eased slightly from June levels.

The dollar overall remained firmly on the defensive with a slide to 25-month lows amid a lack of confidence in fundamentals and EUR/USD strengthened to 22-month highs around 1.1780 before a slight correction. Markets maintained expectations of a very accommodative Federal Reserve policy at Wednesday’s policy meeting and dovish forward guidance. The dollar recovered slightly on Tuesday with EUR/USD retreating to the 1.0730 area, but underlying US sentiment remained weak.

Underlying geo-political concerns continued to underpin the Japanese yen during Monday with a particular focus on persistent US-China tensions.

US fiscal policy remained an important market focus during the day with reports that the Republicans would propose to cut weekly Federal unemployment benefit to $200 from $600. Senate Republicans announced a $1.0trn support package including a cut in unemployment benefits until a new targeted system is introduced by states which replace 70% of previous wages. There were further concerns that partisan disagreement would delay approving any fresh support measures

US equities remained in positive territory, but US yields moved lower and the dollar was unable to make any headway as USD/JPY dipped to 4-month lows near 105.10.

The US recorded a small slowdown in the number of new coronavirus cases on the day, although this is often the case after a weekend and the data on Tuesday will be watched closely. Asian equity markets were able to make limited gains and USD/JPY secured a tentative recovery to the 105.60 area amid a wider correction.

There were reported comments from EU Chief Negotiator Barnier that he believes UK Prime Minister Johnson wants a deal and he is confident that a balanced deal is possible, although it might be less ambitious. There will be further speculation that the UK and EU will eventually reach a minimal free-trade deal to avoid major disruption and continue with trade talks next year. Any deal would provide an element of relief, but uncertainty will remain very high.

Global market conditions continued to dominate Sterling with GBP/USD taking advantage of a weak US dollar to post 4-month highs at 1.2900 before a slight correction. Overall confidence in the UK economic outlook remained fragile, especially with further uncertainty over the UK travel sector and underlying weakness in confidence. The Lloyds business barometer recovered to -22 for July from -30 the previous month with all sectors registering a net gain on the month.

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