US consumer confidence data was notably weaker than expected on Friday which caused some reservations over the overall outlook.

US consumer confidence data was notably weaker than expected on Friday which caused some reservations over the overall outlook. US bond yields moved lower on the day with the 10-year yield below 1.30%. Wall Street equities edged higher as earnings optimism offset growth reservations.

Risk conditions were more fragile on Monday, especially with weaker than expected Chinese data. Asian markets moved lower with Chinese stocks erasing gains in late trading.

The dollar weakened sharply following the US data in thin market conditions before stabilising. EUR/USD strengthened to 1.1800 but was unable to break above this level.  Sterling was dependent on dollar losses to make headway and GBP/USD settled around 1.3850. Commodity currencies reversed intra-day losses on Friday but dipped again on Monday as risk appetite faltered.

The Euro held steady ahead of Friday’s New York open with the dollar unable to gain any renewed traction in global currency markets as tight ranges prevailed.

The US University of Michigan consumer confidence index declined sharply to 70.2 for August from 81.2 previously which was well below consensus forecasts of 81.0 and the weakest figure since 2011. The current conditions index retreated to 77.9 from 84.5 previously while the expectations component dipped to 65.2 from 79.0 in July. The one-year inflation expectations index declined marginally to 4.6% from 4.7% while 5-year expectations increased to 3.8% from 2.8%.

The data does not usually have a substantial market impact, but the very sharp decline for the month did trigger fresh reservations over the consumer spending outlook. In this context, there were also increased concerns over the delta variant impact and the potential impact on the US economy which could also have potentially significant implications for Federal Reserve policy.

Minneapolis Fed President Kashkari stated that he would like to see a few more solid employment reports before tapering.

With low trading volumes, there was a significant impact in currency markets with the dollar losing ground and EUR/USD challenging the 1.1800 level.

The latest CFTC data recorded a decline in long Euro positions to just below 34,000 contracts in the latest week while the overall long dollar position increased to the highest level since early March 2020, limited the scope for further US currency buying.

The dollar stabilised on Monday with EUR/USD trading just below the 1.1800 level as markets monitored risk conditions closely with low trading volumes prevailing.

US Treasuries posted significant gains after the weaker than expected consumer confidence data with the 10-year yield declining to 1.30%. The dollar was already moving lower ahead of the data and losses accelerated as confidence in the spending outlook deteriorated. A USD/JPY break below 110.00 also sapped dollar support and there were sharp losses to lows around 109.60.

CFTC data recorded an increase in short yen positions to over 60,000 contracts in the latest week from 55,000 previously, maintaining the risk of sharp position adjustment and yen gains, especially if global risk appetite deteriorates.

Japanese GDP increased 0.3% for the second quarter of 2021, slightly above consensus forecasts of 0.2% and there was an upward revision for the first-quarter data.

Chinese economic data was weaker than expected with the July industrial production increase held to 6.4% from 8.3% previously and there was also a sharp miss for the retail sales data with an 8.5% increase from 12.1% previously. US yields moved lower and risk conditions were also more cautious, especially with reservations over the situation in Afghanistan. The dollar drifted lower and USD/JPY traded just below 109.50 with EUR/JPY near 129.0.

Sterling was unable to make any headway in early Europe on Friday and there was a further test of GBP/USD support below 1.3800 while GBP/EUR dipped to 1.1750. There were no significant UK data releases during the day with global market trends tending to dominate. There were still some concerns that the UK economic recovery could falter over the next few months which limited the scope for Sterling buying.

The UK currency stabilised against major currencies later in the day while a weaker dollar pushed GBP/USD to highs just above 1.3870.

CFTC data recorded a significant increase in non-commercial Sterling positions with a net long position of just over 7,000 after a marginal short position the previous week. Sterling could gain net support if there is a further increase in long positions.

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