The UK government confirmed that it was still planning to remove coronavirus restrictions in England on July 19th.
Narrow ranges prevailed on Monday with caution ahead of monthly US jobs data. Risk appetite was slightly less confident amid reservations over the global Delta variant coronavirus developments.
US bond yields moved lower on the day with inflation developments also in focus. Wall Street equities were held in tight ranges, but the S&P 500 index and Nasdaq posted fresh record highs. Asian bourses moved lower on Tuesday amid slightly more fragile risk conditions.
The dollar was resilient and posted very limited net gains after recovering from intra-day lows. EUR/USD was unable to challenge 1.1950 and drifted lower. Sterling was unable to hold its best levels and GBP/USD retreated below 1.3900 amid less confident risk conditions. Commodity currencies were pulled slightly lower by a firm US dollar.
ECB council member Holzmann stated that there was still a high degree of uncertainty over the path of prices. Bundesbank head Weidmann commented that he wants to discuss the conditions under which emergency policy ends and noted that financing conditions are still cheap. He also noted that the coming year would not represent a crisis if assumptions about the pandemic are confirmed. There were still expectations that monetary policy would remain very accommodative in the short term.
The Dallas Fed manufacturing index edged lower to 31.1 for June from 34.9 previously and slightly below expectations. Orders, however, increased strongly on the month while wages and prices increased at a record rate on the month amid a sharp increase in the number of companies experiencing supply-side difficulties.
There was a further element of caution ahead of Friday’s US employment report, especially given the potential impact on Federal Reserve policy expectations. Consensus forecasts are for an increase in non-farm payrolls of close to 700,000 on the month and a very strong report would increase speculation that the central bank would move to an early tapering of bond purchases, especially if wages increase sharply.
The dollar was again able to resist selling pressure later in the European session with EUR/USD unable to test the 1.1950 area and retreating to around 1.1920 as commodity currencies also lost ground.
The US currency maintained a firm tone on Tuesday with a further net covering of short dollar positions ahead of the labour-market data later this week. EUR/USD traded around 1.1920 level as commodity currencies resisted further selling pressure.
In comments on Monday, China’s central bank stated that monetary policy will be prudent, flexible, targeted and appropriate. It would also aim to lower real interest rates while keeping the yuan more flexible. The market impact was limited with the yuan gaining net support on yield grounds.
US bond yields moved significantly lower ahead of Monday’s European close with the 10-year yield below the 1.50%. The decline in yields was significant in sapping support for the US currency with a USD/JPY retreat towards the 110.50 level with stabilisation close to this level late in the session.
Richmond Fed President Barkin stated that he expects inflation to moderate over time to more normal levels, although he also noted that there could be a shortage of labour over the medium term if demand continues to bounce back. Comments will continue to be monitored closely in the short term.
US equities closed at record highs, although futures edged lower in Asia on Tuesday. Market conditions overall were subdued during the Asian session with USD/JPY trading just above 110.50 against the yen as the Japanese yen was broadly resilient.
Sterling was unable to hold its best levels on Monday with a GBP/USD peak below 1.3950 and a retreat back below 1.3900. GBP/EUR also found support around 1.1625 having rallied to the 1.1670 area.
Equity markets were unable to make headway with a 0.8% decline in the FTSE 100 index on the day. There has been evidence that shorter-term funds have pulled back from long Sterling positions which would increase pressure on longer-term inflows to support the UK currency. In this context, weaker equities would be a significant setback.
The UK government confirmed that it was still planning to remove coronavirus restrictions in England on July 19th. There were still market reservations over a further strong increase in new coronavirus cases.
There was little change on Tuesday with the UK currency hampered by a slightly less confident tone surrounding risk appetite and GBP/USD around 1.3870.
|09:00||ECB Economic Bulletin|
|09:30||GBP PMI Construction(DEC, 2020)||55||54.7|
|10:00||Euro - Zone Retail Sales (M/M)(DEC, 2020)||-3.40%||-6.10%|
|10:00||Euro - Zone Retail Sales (Y/Y)(DEC, 2020)||0.80%||-2.90%|
|12:00||BOE MPC Vote Cut(FEB 01, 2020)||0|
|12:00||BOE MPC Vote Hike(FEB)||0|
|12:00||BOE MPC Vote Unchanged(FEB)||9||9|
|12:00||BoE QE Purchase Target(M/M)(FEB)||875B||875B|
|12:00||BoE Rate Decision(M/M)(FEB)||0.10%|
|13:30||Nonfarm Productivity (Q/Q)||5.60%||4.60%|
|15:00||USD Factory Orders(JAN)||1.00%|
|21:30||AUD AiG Performance of Service Index(DEC, 2020)||52.9|