Risk appetite held firm on Monday as stronger than expected US data bolstered recovery expectations.

Risk appetite held firm on Monday as stronger than expected US data bolstered recovery expectations. US and European equities posted gains with a fresh record high for the Nasdaq index. US coronavirus fears continued to inject an element of caution and equities were less confident on Tuesday as Chinese stocks pared gains.

The dollar pared losses after the US data and, although there were still net losses amid a lack of defensive demand, the US currency recovered ground on Tuesday. Sterling was held in tight ranges and struggled to make any headway despite firm global risk conditions as sentiment remained fragile.

Commodity currencies posted net gains on global recovery hopes, although there was greater caution on Tuesday. AUD/USD was held below 0.7000 as risk appetite dipped with little impact from the RBA decision.

The Euro-zone Sentix investor confidence index recovered to -18.2 for July from -24.8 previously, although this was below consensus forecasts of -10.9 with some evidence of scepticism over the pace of recovery. A stronger yuan helped underpin the Euro against the US dollar as the Chinese currency strengthened to 3-month highs against the US currency. The single currency maintained a firm tone ahead of the New York open and EUR/USD hit 3-week highs near 1.1345.

The US PMI services-sector index was revised to 47.9 for the final reading from 37.5 the flash reading of 46.7 and 37.5 the previous month. The ISM non-manufacturing index strengthened sharply to 57.1 for June from 45.4 previously and well above market expectations of 50.2. This was the strongest reading since March and the largest monthly gain on record. The business activity index strengthened sharply to 66.0 from 41.0 and the new orders component also rebounded strongly on the month. There was only a small increase in order backlogs while employment continued to decline on the month. The overall components were slightly less encouraging that the headline figure.

The dollar regained some ground following the data, although EUR/USD was able to hold above the 1.1300 level. Underlying trade tensions between the US and EU persisted with the EU reiterating that it would retaliate if the US pushes ahead with imposing tariffs on EU exports.

CFTC data recorded a net decline in long Euro positions from 2-year highs, slightly increasing the potential for fresh buying of confidence improves. The dollar remained subdued on Tuesday amid expectations of global recovery, but it was resistant to further losses with EUR/USD around 1.1300 as German industrial production recovered 7.8% for may compared with expectations of a 10.0% gain.

According to sources, the Bank of Japan is likely to maintain its current view of the economy at next week’s policy meeting. The bank is, however, also likely to warn that there are extremely high risks to the outlook, especially given the threat of a second wave of coronavirus infections while no policy changes are expected.

The dollar briefly made gains following the US ISM data, but rallied quickly faded and the US currency retreated steadily later in New York. Atlanta Fed President Bostic stated that the US high-frequency data had shown a levelling-off of economic activity and the economic rebound may stall given the spike in coronavirus cases. Bostic also pointed to a high degree of uncertainty over the outlook and the expansionary Fed policy will inevitably continue.

US coronavirus developments were mixed with some moderation in Arizona, but there was an increase in the New Jersey infection rate. Texas also registered a record daily increase in cases, although there were potential distortions surrounding the weekend. Asian equity markets secured further gains on Tuesday, although momentum slowed after state-owned media urged investors to be rational. Japan’s household spending declined 16.2% in the year to May compared with estimates of an 11.8% decline. USD/JPY was held in tight ranges and found some support on dips to trade around 107.50 in early Europe.

The UK PMI construction index strengthened sharply to 55.3 for June from 28.9 the previous month which was the highest headline reading since July 2018 and well above consensus forecasts of 46.0. Overall confidence and new business increased marginally on the month, although there was still an important aspect of caution while employment declined further. There was further issue with supply chains which was a contributory factor putting upward pressure on costs.

The data failed to inspire Sterling which was held in tight ranges. There was support from the firm tone in global risk appetite, but it was unable to make headway amid reservations over the underlying fundamental outlook, especially given tensions with China.

GBP/USD was unable to hold above 1.2500 and settled just below this level while GBP/EUR made slight losses to trade around 1.1030. There was little change in short positions in the latest week according to CFTC data as markets lacked conviction. Latest reports indicated that Chancellor Sunak would bring forward a stamp-duty holiday to take effect immediately in order to avoid damaging the housing market.


Economic Calendar

07:00German Industrial Production (M/M)(MAY)10.00%-17.90%
08:30GBP Halifax HPI (M/M)(JUN)--0.20%
15:00USD JOLTs Job Openings(MAY)5.000M5.046M
15:00CAD Ivey PMI(M/M)(JUN)-39.1

*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.