Overall risk appetite held steady on Monday despite Delta variant concerns.

Overall risk appetite held steady on Monday despite Delta variant concerns. US Treasuries lost ground with a limited net increase in bond yields.

There was an element of caution ahead of US inflation data as narrow ranges prevailed. European and Asian equities posted record highs. Wall Street posted limited net gains to a fresh record high.

The dollar was mixed but posted a slight net decline on the day. EUR/USD was little changed during the day. Sterling recovered from intra-day lows and posted a slight net advance with GBP/USD held just below 1.3900. Commodity currencies secured net gains but were unable to hold intra-day peaks.

ECB vice-president de Guindos stated that inflation was expected to be on the rise until the end of 2021 and risks to the outlook are tilted to the upside.

Council member Kazimir stated that changes to the inflation mandate will strengthen the central bank toolbox and enhance an anchoring of inflation expectations.

There was little overall impact from the rhetoric with choppy trading in relatively narrow ranges. Risk appetite strengthened after the New York open which helped underpin commodity currencies and the Euro was also able to make limited headway as the dollar lost territory in global markets.

Richmond Fed President Barkin stated that a tapering of bond purchases could happen sooner if the labour market can clear relatively quickly and he hopes that this point could be seen relatively soon, but he insisted that now is not the time to call an end to bond purchases. Specifically, Barkin stated that he wanted the employment to population rate to be at least 59% before tapering from 58% now.

New Yok Fed President Williams stated that the economy had not yet reached substantial progress which would justify a tapering of bond purchases and he indicated that he was against a reduction in MBS buying before Treasuries. There was no evidence of a shift in underlying Fed policy at this stage.

Relatively narrow ranges prevailed during the day with EUR/USD drifting towards 1.1850 from highs at 1.1880. The US CPI report will be watched closely for further evidence on inflation trends and potential implications for Federal Reserve policy with choppy trading likely after the release and significant relief if there is a lower than expected release. EUR/USD traded around 1.1860 in early Europe as risk conditions held firm.

After a hesitant start in Europe on Monday, US equity futures posted net gains which helped underpin risk appetite. US Treasuries were little changed with a limited net increase in US bond yields during the day with the 10-year yield around 1.36% from 1.33%.

The latest New York household survey recorded an increase in the 1-yar inflation expectations figure to 4.8% from 4.0% previously with the 3-year rate steady at 3.6% while confidence in the labour market strengthened. Inflation developments will continue to be watched closely in the short term.

Overall, the yen lost ground with USD/JPY strengthening to around 110.35 at the European close as the yen lost ground on the crosses.

There was strong demand in the latest 10-year bond auction which nudged yields lower with the dollar settling little changed.

In dollar terms, Chinese trade data recorded an increase in exports of 32.2% in the year to June and above market expectations of 23.2% with imports increasing 36.7%.

Risk appetite held firm in Asia with gains for regional bourses and USD/JPY edged higher to 110.40 with EUR/JPY just below 131.0.

Sterling lost ground in early Europe on Monday amid concerns that the measures to ease coronavirus restrictions may not be sustainable amid an increase in infection rates. In the House of Commons, Health Secretary Javid stated that the next phase of the roadmap would go ahead as planned on July 19th with a phasing out of all restrictions in England and there were hopes that the easing of restrictions would underpin the economic recovery, but with a high degree of uncertainty.

Sterling regained territory after the New York open, although the principal driver was a further net improvement in equity markets while overall risk appetite held firm which helped underpin the UK currency. From lows below 1.3850, GBP/USD strengthened to near 1.3900 at the European close with GBP/EUR just above 1.1700.

BRC data recorded a like-for-like increase in UK retail sales of 6.7% in the year to June from 18.5% previously and well below expectations, but with strong growth from 2019. Barclaycard reported an increase in consumer spending of 11.1% in the year to June from 7.6% previously.

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