Sterling gained ground on hopes for Brexit progress and expectations of further fiscal stimulus.

Risk appetite was more fragile during Tuesday as unease over global coronavirus developments continued. Texas and California both recorded new daily infection increases of over 10,000 on the day. Equity markets posted measured losses with very strong Fed support continuing to limit selling pressure. Chinese equities also posted renewed gains.

The dollar was able to draw an element of support from defensive demand, but failed to make much headway amid fundamental reservations. EUR/USD traded below 1.1300 as downbeat forecasts limited Euro support.

Sterling gained ground on hopes for Brexit progress and expectations of further fiscal stimulus with GBP/EUR above 1.1120. Commodity currencies lost ground amid the more cautious risk tone.

In its latest economic update, the European Commission revised its 2020 Euro-zone GDP forecast to a decline of 8.7% from the previous estimate of a 7.7% contraction with the second-quarter contraction estimated at 13.5%. According the Commission, Germany is forecast to decline 6.3% with contractions of over 10% for France, Spain and Italy. Overall economic risks are tilted to the downside and the Commission also warned that recovery will be uneven across member states. For 2021, the Commission is forecasting growth of 6.1%. Longer-term inflation expectations have increased to near 4-month highs which will be a significant relief for the ECB.

The generally downbeat assessment undermined Euro support, however, and EUR/USD was unable to hold the 1.1300 level with a retreat to the 1.1260 area.

US JOLTS job-openings data recorded an increase to 5.40 million at the end of May from a revised 5.00 million previously as separations declined sharply.

The July IBD consumer confidence index declined to 44.0 from 47.0 previously, reinforcing concerns that the economic recovery would lose momentum due to fresh coronavirus concerns. Fed vice-chair Clarida stated that more accommodation can be put in place in the economy and there is no limit on the amount of bond buying that can be put in place. Atlanta Fed President Bostic reiterated that business owners are nervous again and that the next 3-6 weeks could be critical. There were also expectations from Fed officials that further fiscal support measures would be needed.

EUR/USD edged back to the 1.1300 area, but uncertainty dominated markets and the pair edged lower again to trade around 1.1270 on Wednesday as a more cautious risk tone triggered an element of defensive dollar demand.

According to sources, the Bank of Japan is not likely to make significant monetary policy changes at next week’s policy decision. The overall yen impact was limited and narrow ranges continued to prevail with markets still unable to generate any momentum in the pair.

USD/JPY was unable to move above 107.80 and retreated to the 107.50 area. There was further underlying unease over US coronavirus developments with Texas and California both reporting a daily increase in cases of over 10,000 while Texas also reported a very high rate of positive tests which suggested that underlying infection rates were much higher in the community. US equities retreated after a string of daily gains which dampened risk appetite.

Japanese chief cabinet secretary Suga reported that further easing of coronavirus restrictions will go ahead as planned on July 10th which provided some yen support.

There was further friction between the US and China with reports that the US was considering whether it could destabilise the Hong Kong currency peg. Narrow ranges prevailed with USD/JPY settling around the 107.50 area with both currencies again unable to secure any significant momentum.

The Halifax reported a decline in house prices of 0.1% for June with prices declining for four consecutive points for the first time since 2010, although there was still an annual increase of 2.5%. The EU Commission forecast that the UK economy would contract 9.75% for 2020 compared with the EU estimate of a contraction of 8.7%, reinforcing reservations over the relative outlook. Sterling moved lower in early Europe with a less confident global risk tone also having a negative impact.

The UK currency regained ground ahead of the New York open amid some hopes for progress in EU/UK trade talks. Reports indicated that the EU was prepared to offer concession on the fishing issue which could make it easier to secure a compromise.  It was also announced that EU chief negotiator Barnier and UK counterpart Frost would meet for dinner at Downing Street on Tuesday. There was a significant improvement in Sterling sentiment with GBP/USD gains to above 1.2580 while GBP/EUR rallied above the 1.1120 level.

Prime Minister Johnson reiterated that he was looking for an early trade agreement, but again insisted that the UK would leave without agreement if necessary. Chancellor Sunak will announce his support package on Wednesday including a £2.0bn support package for youth employment.

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