Expectations of very loose Federal Reserve policies remained a key element in global markets.

Expectations of very loose Federal Reserve policies remained a key element in global markets. Position adjustment also had an important element on Monday with choppy trading.

The dollar remained under sustained pressure amid the lack of yield support and notably weak sentiment. EUR/USD maintained a strong tone and tested the key 1.2000 area on Tuesday.

Sterling secured a notably strong tone despite fundamental reservations with GBP/USD at 8-month highs. Risk appetite held steady amid expectations of low interest rates.

Commodity currencies were boosted by US dollar losses with fresh 18-month highs for

US personal income increased 1.9% for July compared with expectations of 1.5% with the increase in income held to 0.4%. The core PCE prices index increased 0.3% on the month with the year-on-year rate at 1.3% from 1.0% previously. Despite the monthly increase, the rate remains well below the 2.0% target, reinforcing expectations of a very loose US monetary policy, especially after the Fed announcement that it would switch to an average inflation target.

The dollar overall was unable to make headway and EUR/USD settled close to 1.1900.

CFTC data recorded a fresh increase in long Euro positions to a record high of close to 212,000 from 196,000 the previous week, maintaining the potential for a sharp correction if sentiment shifts.

German consumer prices declined 0.1% for August with year-on-year inflation at 0.0% compared with consensus forecasts of 0.1% and reinforcing a lack of inflationary pressure. ECB council member Schnabel, however, stated that there was no need to adjust policy if the economy meets forecasts.

Federal Reserve vice-chair Clarida stated that that macro models had been wrong and that it was difficult to justify higher interest rates in the absence of inflation. He reiterated a lack of support for negative interest rates and expressed reservations over yield curve control. He also stated that there are powerful global deflationary forces. The dollar overall remained under sustained pressure with month-end position adjustment a significant factor and complementing negative underlying sentiment.

The dollar dipped to fresh 27-month lows during New York trading to post a fourth successive monthly decline with EUR/USD above 1.1950. The US currency secured no relief in Asia on Tuesday as underlying sentiment remained notably weak with fresh 27-month lows as EUR/USD tested the important 1.2000 area.

The yen maintained a firmer tone on Friday with further speculation that there would be a shift in monetary policy following the resignation of Prime Minister Abe. The very loose Bank of Japan policy was a key pillar of Abe’s economic platform and markets expected a slightly more cautious approach under a new leader with USD/JPY selling above 106.00.

Japanese preliminary industrial production increased 8.0% for July and above market expectations of 5.0%, but retail sales declined.

The August Chinese PMI manufacturing index was little changed at 51.0 from 51.1 previously while the non-manufacturing index strengthened to 55.2 from 54.2 previously which boosted confidence in the Chinese services-sector economy. The Caixin manufacturing PMI strengthened to 53.1 from 52.8 in July.

Although the dollar overall remained under pressure, the Japanese yen performed even worse amid position adjustment. The dollar advanced to near 106.00 before fading with the Japanese currency retreating sharply. The largest faction in Japan’s LDP party backed chief cabinet secretary Suga to replace Abe, increasing expectations of policy continuity with USD/JPY trading around 105.75 as dollar weakness dominated with the yen slightly weaker on the main crosses.

Sterling maintained a strong tone on Friday with a GB/USD break above 1.3300 while GBP/EUR rallied to 2-month highs near 1.1220 despite UK caution.

CFTC data recorded a small net decline in long Sterling positions, although there was a dip in both long and short positions for the week as caution prevailed.

There were reports that the UK government was considering increased taxes on companies and capital gains to help narrow the budget deficit over the medium term, although the market impact was limited. French officials commented that Brexit talks were not advancing because the UK is being unrealistic while the UK government reiterated that it was prepared to walk away from talks if there was no move to a compromise.

Sterling maintained a strong tone despite fundamental reservations and GBP/USD posted 8-month highs close to 1.3400 against the dollar before a slight correction while GBP/EUR secured only a marginal recovery to 1.1220. Dollar weakness dominated on Tuesday with GBP/USD at fresh 8-month highs just above 1.3400.

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