Edgy conditions ahead of Friday’s key US employment report.

Risk appetite dipped sharply in the middle of Tuesday before a strong recovery in indecisive trading. There were edgy conditions ahead of Friday’s key US employment report. US bond yields edged higher from intra-day lows as risk appetite improved. Wall Street equities recovered ground sharply after initial losses.

The dollar failed to hold intra-day gains as defensive demand eased slightly. The yen and Swiss franc maintained a firm underlying tone on low yields elsewhere.

Sterling also recovered from intra-day lows with position adjustment ahead of Thursday’s Bank of England meeting. Commodity currencies were subjected to choppy trading with limited net gains as risk conditions dominated.

The Euro held a firm tone ahead of Tuesday’s New York open, but gains were very limited and there was no EUR/USD challenge on the 1.1900 level.

Risk appetite started to deteriorate just after the US open with equities losing ground and this helped trigger renewed defensive dollar demand, especially with losses in commodity currencies. In this environment, the Euro drifted lower, although tight ranges still prevailed.

The focus will start to move towards the employment situation on Wednesday with the ADP data at the New York open ahead of jobless claims figures on Thursday and monthly employment report on Friday. Friday’s jobs report will have an important impact on Federal Reserve expectations and global currency markets.

St Louis Fed President Bullard reiterated that he wants the ending crisis-era policies to begin soon in order that the central bank can move in small steps rather than having the risk of a scramble if high inflation persists. He continued to back an early tapering of bond purchases.

San Francisco head Daly stated that there was no reason to expect factors crimping labour supply will be permanent.

Comments from Federal Reserve officials will continue to be watched closely with vice-president Clarida due to issue remarks on Wednesday.

The dollar gained some traction after the Wall Street open, but EUR/USD found support just above 1.1850 and the US currency was unable to hold intra-day highs and drifted weaker later in the session with EUR/USD consolidating around 1.1865.

Tight ranges prevailed on Wednesday with EUR/USD around 1.1870 while commodity currencies secured slight gains and defensive dollar demand declined slightly.

The dollar held steady ahead of the US open on Tuesday, but unable to make any headway as equity futures stalled. There was a significant dip in risk appetite as Wall Street opened with weaker equities and a dip in crude oil futures which sapped confidence.

In this environment, there was renewed defensive demand for the Japanese currency as markets favoured safe-haven currencies. USD/JPY dipped below the 109.00 level while EUR/JPY also retreated sharply to near 129.20 as risk conditions remained a key element.

Wall Street equities recovered ground strongly later in the day and the USD/JPY nudged back above the 109.00 level, although the Japanese currency was still broadly resilient given global coronavirus developments and further uncertainty over global supply-side issues.

There were reports that Japan is considering a nationwide state of emergency which maintained concerns over coronavirus developments. Asian equities secured net gains on Wednesday with USD/JPY trading just above the 109.00 level while EUR/JPY was close to the 129.50 level.

Sterling posted limited net gains in early Europe on Tuesday with the UK currency posting net gains against the US dollar while the Euro edged lower.

There was relative optimism over the UK coronavirus outlook with hopes that the UK could approach herd immunity over the next few weeks which would help underpin the UK recovery and give the Pound a relative advantage in global markets.

There were no significant data releases on Tuesday and an element of caution ahead of Thursday’s Bank of England policy meeting.

Risk appetite, however, deteriorated significantly after the New York open which had a significant impact in curbing Sterling support.

The UK currency edged higher later in the session amid recoveries in equity markets as global risk conditions continued to have an important impact. GBP/USD traded around 1.3925 on Wednesday with GBP/EUR held around 1.1730 as underlying tensions increased.

Economic Calendar

08:45Markit/ADACI Svcs PMI(JUL)56.7
08:50Markit Serv PMI(JUL)57
08:55EUR German PMI Composite(JUL)62.5
08:55EUR German PMI Services(JUL)62.2
09:00Euro-Zone PMI Composite(JUL)60.6
09:00Euro-Zone PMI Services(JUL)60.4
09:30GBP PMI Services(JUL)57.8
10:00Euro - Zone Retail Sales (M/M)(JUN)4.60%
10:00Euro - Zone Retail Sales (Y/Y)(JUN)9.00%
12:00USD MBA Mortgage Applications5.70%
13:30CAD Building Permits (M/M)(JUN)-14.80%
14:45USD Markit PMI Composite(JUL 01)63.6
14:45USD Markit Services PMI(JUL)
15:00USD ISM Non-Manufacturing PMI(JUL)60.1

*All rates shown are indicative of interbank rates and should only be used for indication purposes only. It is important to note that foreign exchange rates fluctuate and that rates may vary depending on the amount and the base currency that is purchased or sold. Rates are correct as of 8:00am UK time. CentralFX are not responsible for the rates shown.