Market activity was limited by the US market holiday on Monday with narrow ranges prevailing.

Market activity was limited by the US market holiday on Monday with narrow ranges prevailing. European equities made net gains amid coronavirus vaccine hopes with markets subdued in Asia.

US equity futures posted net gains with US politics in focus. The dollar was held in very tight ranges with the Euro hampered by speculation over a more dovish tone at this week’s meeting.

Sterling was undermined by Brexit concerns as speculation that trade talks would fail increased with GBP/USD below 1.3150. Commodity currencies edged lower with a dip in oil prices hampering the Canadian dollar.

German industrial production increased 1.2% for July after a 9.3% gain the previous month and below market expectations of a 4.7% increase.

The Euro-zone Sentix investor confidence index improved to -8.0 for September from -13.4 previously and above consensus forecasts of -10.5. The data will offer some support to growth expectations, although there will still be expectations of a slowdown in the rate of improvement, especially given a net increase in coronavirus cases.

The Euro drifted in narrow ranges ahead of the New York open and activity was inevitably stifled ahead of Thursday’s ECB policy meeting.

There was further speculation that the central bank could engage in verbal intervention to restrain the currency. There were no expectations of any policy changes at this meeting, although many investment banks expect a further increase in the quantitative easing programme later this year. There was also further speculation that there would be verbal intervention to restrain the currency.

Tensions over Brexit trade talks had a limited negative impact on the Euro while the dollar held steady. EUR/USD drifted to the 1.1800 area in early Europe on Tuesday, but again found support close to this level. Low yields continued to limit the scope for US dollar gains. The German trade surplus increased for July, although exports and imports were slightly below consensus forecasts.

US equity futures briefly lost ground in Europe on Monday, but there was buying interest later in the day. US equity markets were closed for a holiday which limited activity and the dollar edged higher to the 106.30 area as S&P 500 futures posted net gains.

There will be no comments on monetary policy from Federal Reserve officials this week ahead of the September 16th policy decision.

Japan’s second-quarter GDP was revised marginally to -7.9% from -7.8% reported previously. Household spending declined 7.6% in the year to July from -1.2% previously and weaker than forecasts of -3.6%. Asian equity markets were mixed with modest losses in China while Japan’s Nikkei index posted net gains.

Markets will be monitoring the US political developments with the pace of campaigning expected to pick-up sharply following Monday’s Labor Day holiday. The dollar was unable to make headway in Asia and USD/JPY settled around 106.25 with the Japanese currency securing a marginal advance against the Euro.

Halifax reported a 1.6% increase in UK house prices for August after a 1.7% gain the previous month. The monthly increase was slightly above market expectations with an annual increase of 5.2% from 3.8% previously, although political developments dominated during the day.

EU Commission President Von der Leyen called on the UK to implement the withdrawal agreement. EU Chief Negotiator Barnier declined to comment directly, but stated that the talks were difficult because the UK wanted the best of both worlds. The UK government attempted to play down the issue with comments that the new legislation was designed to clarify a few issues. Prime Minister Johnson and French President Macron stated that they agree on the importance of making headway this month.

For the second day running the UK reported an increase in new coronavirus cases of close to 3,000. Health Secretary Hancock stated that the UK had not lost control of the coronavirus situation. Bank of England chief economist Haldane stated that the furlough scheme should not be extended with other support measures instead.

Market tensions persisted with 6-month implied volatilities increasing to 2-month highs. GBP/USD declined to lows below 1.3150 before finding support with GBP/EUR correcting to around 1.1130.

Johnson, however, added that the Withdrawal deal was contradictory and needed to be re-written to protect the Union.

BRC data recorded a 3.9% increase in annual retail sales for August and Barclaycard reported a 0.2% annual increase in consumer spending, the first annual increase since February. Sterling overall remained on the defensive and GBP/USD traded around 1.3150 on Tuesday with GBP/EUR close to 1.1130.

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