Confidence was more fragile on Thursday as US coronavirus cases hit another record high with US futures and Asian stocks moving lower.

Risk appetite held firm on Wednesday with expectations of progress towards developing a coronavirus vaccine providing support. There were net gains for US equities, but volatility was an important feature.

Confidence was more fragile on Thursday as US coronavirus cases hit another record high with US futures and Asian stocks moving lower. The dollar dipped to 1-month lows before finding some relief as equities retreated.

EUR/USD posted 4-month highs at 1.1450 before fading to register slight losses. Sterling retreated from best levels with no support from UK jobs data as payrolls declined. The Canadian dollar posted sharp gains as the Bank of Canada held monetary policy steady.

There were comments from French officials on Wednesday that they believe a deal can be reached this week on the EU recovery fund. There was market optimism that some form of agreement would be reached this month even if it was not possible to secure a deal at the Summit starting on Friday. Anticipation of a deal was a significant factor supporting the Euro and the dollar remained under pressure as risk appetite remained firm with the US currency index dipping to 1-month lows.

The New York Empire manufacturing index strengthened to a 14-month high of 17.2 for July from -0.2 previously and above consensus forecasts of 10.0. This was the first positive reading since February. The new orders component also moved into expansion territory, although unfilled orders declined marginally. Prices received edged lower on the month while employment increased slightly. Companies were less optimistic over the 6-month outlook, although investment intentions strengthened slightly.

Industrial production increased 5.4% for June after a 1.4% gain previously and above consensus forecasts of 4.5% with manufacturing posting a 7.2% advance.

Elsewhere, import prices increased 1.4% for June, although there was still a 3.8% annual decline with expectations of weak inflation pressure.

There were still strong expectations that the Federal Reserve would maintain a very accommodative policy which limited dollar support. The dollar stabilised later in New York and EUR/USD retreated to near 1.1400 from 4-month highs around 1.1470. The US currency stabilised on Thursday with EUR/USD marginally lower as markets waited for the ECB policy meeting and EU recovery fund developments with reports that the central bank would keep policy on hold to assess the data.

Philadelphia Fed President Harker stated that he is revision his economic outlook as US infections spike. He was sceptical that the next jobs report would be as favourable as the May and June reports. He also supporting letting inflation move above 2% before adjusting monetary policy.

The number of new coronavirus infections in Florida increased to just over 10,000 from 9,261 the previous day with the data overall suggested that the curve was flattening to some extent.

California, however, recorded the second-highest daily increase on record and there was evidence that underlying consumer spending was slowing. Markets remained optimistic that progress was being made towards a vaccine which was a key factor underpinning risk appetite. USD/JPY was held in tight ranges and settled just below 107.00. The US overall resisted a record increase in new coronavirus cases of 67,000 which undermined confidence on Thursday.

China’s GDP data was reported as 3.2% in the year to the second quarter from -6.8% previously and above consensus forecasts of 2.2%. Industrial production was in line with market expectations while retail sales remained in negative territory.  Risk appetite overall was less buoyant as equities declined with USD/JPY around 106.90.

There was little impact from the UK inflation data with the data having no significant implications for monetary policy in the short term. Bank of England MPC member Tenreyro stated that there indications of a sharp recovery in purchases that had been restricted by business closures. She also expressed underlying concerns and was ready to vote for further monetary action if necessary to ensure that inflation returns to target. She had no personal view on negative interest rates.

There were still concerns over UK relations with China following the decision to strip Huawei from developing the 5G network. There were fears that inward investment would be damaged which could be costly given that the UK runs a substantial current account deficit.

Sterling secured net gains as risk appetite remained firm and the US dollar remained on the defensive. Latest labour-market data recorded a smaller than expected employment decline of 126,000 in the 3 months to May with the June claimant count declining 28,000, but the number of people on payrolls declined further and the Chambers of Commerce report expected heavy job cuts. Sterling was little changed after the release with GBP/USD just below 1.2550 as markets attempted to assess the data.

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