There was volatile month-end trading on Friday with an underlying lack of liquidity amplifying moves.

There was volatile month-end trading on Friday with an underlying lack of liquidity amplifying moves. The dollar eventually made significant gains as it corrected stronger from sharp losses, but still posted the worst month for over 10 years.

EUR/USD settled below 1.1800 and was unable to regain momentum on Monday. The yen and Swiss franc retreated with USD/CHF recovering from 5-year lows.

Sterling corrected weaker against the dollar, but held a firm overall tone with the Euro just below 0.9000. Commodity currencies overall were unable to make any headway amid global coronavirus unease and a US dollar recovery.

According to the flash release, Euro-zone GDP declined 12.1% in the second quarter of 2020 following a 3.6% decline for the second quarter. This was weaker than consensus forecasts of 11.2% with the annual decline at 15.0%. Italian GDP declined 12.4%, although this was stronger than consensus forecasts of a 15.0% contraction. In contrast, Spanish GDP declined 18.5% for the quarter. The flash inflation estimate recorded an increase in the CPI inflation rate to 0.4% from 0.3% and above consensus forecasts of 0.3% while the underlying rate increased to 1.2% from 0.8% and well above market expectations of 0.8%.

US personal spending increased 5.6% for June, close to expectations while personal income declined 1.1% following a 4.4% dip previously. The core PCE prices index increased 0.9% over the year from 1.0%. The Chicago PMI manufacturing index strengthened to 51.9 from 36.6 previously and the highest reading since July 2019.

There was some speculation that the ECB could express concern over the speed of the Euro’s gains, especially given the need to support exports and concern over disinflationary pressures. There was choppy month-end trading with the Euro also vulnerable to a correction after sharp gains. Overall, EUR/USD declined to near 1.1770 at the US close as the dollar staged a significant recovery from 26-month lows. The US currency overall still posted the sharpest monthly decline for 10 years.

CFTC data recorded an increase in short non-commercial dollar positions to the highest level for close to nine years while long Euro positions increased to a record high over 157,000 contracts. This extreme positioning will maintain the threat of a further Euro correction weaker.  EUR/USD dipped to near 1.1740 in Asian trading before trading above 1.1750 in early Europe as underlying US sentiment remained negative, especially with a lack of yield support.

Japanese officials continued to warn over the need for currency stability and Finance Minister Aso warned that markets were being monitored with a sense of urgency. Underlying dollar sentiment remained negative, although there was an important element of short covering later in the day with the yen retreating sharply. USD/JPY strengthened to highs near 106.00 before settling around 105.80 as volatility increased sharply.

There was no agreement on the US fiscal stimulus bill on Friday and the House of Representatives will cancel the August recess in order to continue talks.

Fitch maintained the US credit rating at AAA, although the outlook was lowered to negative from stable due to increased concerns over the fiscal and credit situation. Underlying confidence in US fundamentals remained fragile and there were important reservations whether there would be any near-term deal for the fiscal stimulus.

China’s Caixin PMI non-manufacturing index strengthened to 52.8 for July from 51.2 previously and significantly above market expectations and Japan’s GDP declined 0.6% for the second quarter compared with expectations of 1.1%. Asian equities made net gains, although US futures failed to make headway. USD/JPY briefly spiked to the 106.40 area before a retreat to 105.80 at the European open with markets continuing to monitor any comments from Japan’s Ministry of Finance.

There were no major domestic developments on Friday with further concerns over the UK coronavirus situation not having a significant impact and Sterling held firm into the New York open even though underlying market sentiment remained negative. There was solid underlying Sterling demand on month-end positioning grounds, but the UK currency lost ground close to the European close. GBP/USD dipped below 1.3100 as the US currency regained ground, although GBP/EUR remained on the defensive with a close near 1.1100.  GBP/USD posted the strongest monthly advance since 2009.

CFTC data recorded a significant increase in short Sterling positions to over 25,000 contracts, the highest level since early June. This will increase the potential for short covering if the UK currency remains resilient. Trade developments will continue to be monitored closely with the UK and US holding talks in Washington on Monday and Tuesday.

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