Dollar under further pressure.

The US ISM manufacturing index edged lower to 52.8 for July from 53.0 previously, but slightly above consensus forecasts of 52.3. Production growth slowed while orders were in contraction territory for the second successive month. There was also a marginal contraction in employment for the third successive month.

The prices index declined to 60.0 from 78.5 previously which the fourth-largest monthly decline on record and the steepest rate of decline since June 2010. This was also the lowest reading since September 2020.

Although the data was slightly stronger than expected, the decline in cost pressures was the main focus within the survey.

Following the US ISM prices data, the 10-year yield dipped to around 2.60% and the lowest reading for 16 weeks. There was also a sharp decline in oil prices on the day which reinforced the mood of optimism over underlying inflation trends. There was also a slight steepening of the yield curve inversion even though the 2-year yield dipped to just below 2.85%.

US yields declined further on Tuesday with the 10-year yield at 16-week lows around 2.55%.

Lower yields were a crucial element in undermining the US currency with particular pressure against the yen. The dollar index overall dipped to 4-week lows.

USD/JPY also dipped sharply to 4-week lows below 130.50 before a limited correction.

German retail sales declined 2.6% for June compared to expectations of a small increase with a year-on-year decline of 8.8%. The final reading for the July Euro-Zone PMI manufacturing index was revised slightly higher to 49.8 from 49.6, but both Spanish and Italian figures were in contraction territory for the month.

Political considerations were more important on Tuesday with important tensions surrounding Taiwan amid the planned visit by US House Speaker Pelosi. China continued to warn over negative consequences and risk conditions were brittle.

Taiwan concerns also contributed to gains for the yen in Asia on Tuesday.

The Reserve Bank of Australia (RBA) increased interest rates by a further 50 basis points to 1.85% which was in line with market expectations.

The RBA expects to increase rates further, but there were comments that rates are not on a pre-determined path which dampened market expectations over further aggressive rate hikes and the Australian dollar lost ground.

The Euro drew support from a rally in Italian bonds and a narrowing in the Italian/German yield spread to 220 basis points. Lower yields were crucial in undermining the dollar. Risk appetite was less confident on Tuesday, but the dollar was unable to secure significant defensive demand. EUR/USD hit 4-week highs at 1.0275 before a slight correction.

USD/JPY dipped sharply to lows just below 130.50 before a slight recovery. The yen also gained strong support on the crosses with EUR/JPY lows near 134.00.

The Swiss franc weakened marginally as Italian yields declined. EUR/CHF edged higher to 0.9750 with USD/CHF just above 0.9500.

Sterling posted net gains amid short covering into the Bank of England rate decision. GBP/USD peaked at 1.2295 before fading to below 1.2250 as equities retreated.

The Canadian dollar was hampered by a slide in oil prices. USD/CAD rallied to 1.2865 on Tuesday from 1.2770 lows on Monday.

Taiwan concerns undermined the Australian dollar and rate expectations were scaled back after the RBA statement. AUD/USD failed to hold above 0.7000 with a sharp retreat to around 0.6950.

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