The ECB made no policy changes and President Lagarde indicated the whole PEPP emergency bond-buying envelope would be used.

The ECB made no policy changes and President Lagarde indicated the whole PEPP emergency bond-buying envelope would be used.

There was caution ahead of Friday’s EU Summit meeting with increasing pressure for recovery-fund agreement. US retail sales data was stronger than expected with a solid overall data trend. US total coronavirus cases posted a fresh daily record high which maintained an important element of caution.

Risk appetite was cautious with measured net losses for US equities, but Asian stocks posted slight gains. The dollar recovered ground as the Euro failed to hold gains with EUR/USD below 1.1400.  Sterling again failed to hold its best levels amid unease over fundamental reservations.

Headline US retail sales increased 7.5% for June compared with consensus forecasts of a 5.0% increase and followed an upwardly-revised 18.2% increase for May. Underlying sales increased 7.3% on the month and the control group registered a 5.6% advance after a 10.1% gain the previous month.

The Philadelphia Fed manufacturing index retreated slightly to 24.1 for July from 27.5 previously, but was above consensus forecasts of 20.0. There was a stronger increase in new orders, although only a small increase in unfilled orders while employment increased. Initial jobless claims declined slightly to 1.30mn for the latest week from 1.31mn previously, although slightly above consensus forecasts of 1.25mn. Continuing claims declined to 17.3mn with overall claims, including Federal benefits, declining to 32.0mn from 32.4mn previously. The data overall was stronger than expected, but markets remained uneasy over the risk that recovery would stall given the fresh increase in coronavirus cases, especially as transportation indices indicated very little recovery and mobility indices have lost ground.

The ECB held interest rates unchanged at the latest policy meeting with the main refi rate remaining at 0.0%. Bank President Lagarde stated that the economy had shown signs of a significant though patchy and uneven recovery while the risks were still tilted to the downside and uncertainty over the rebound also remained high.

Overall she expressed confidence in the bank’s emergency programmes which were working. Looking at PEPP emergency bond purchases, Lagarde expected that the full envelope of EUR1350bn would be used unless there are significant upside surprises to the baseline scenario. There are differences of opinion on the council with two members indicating that full provision may not be needed.

EUR/USD overall secured net gains to the 1.1430 area at the European close. An EU official stated that there are still important differences over the recovery find and agreement is not there yet while Lagarde stated that an ambitious and co-ordinated fiscal response remains critical. EUR/USD retreated to near 1.1380 as the dollar recovered some ground with markets watching the EU Summit very closely on Friday and Saturday.

The US dollar was able to gain some support following the latest data releases and USD/JPY moved back above the 107.00 level. Overall moves were, however, limited as US bond yields moved lower despite the upbeat data releases. New York Fed President Williams stated that the economy is facing more deflationary than inflationary pressure and this is not the time for the central bank to consider exit strategies.

The number of new coronavirus cases in Florida increased to over 13,800 and the number of deaths increased to a fresh record, although the overall death rate remained lower than in the New York outbreak. The increase in national cases pushed to a record high of over 70,000, reinforcing concerns. Texas governor Abbot stated that there would be no shutdown in the state despite the surge in cases.

There were further concerns over US-China diplomatic tensions, especially with the US Administration threatening to block US access for Communist Party members. China, however, indicated further policy stimulus was likely which helped protect risk conditions with regional markets mixed and a weaker offshore yuan. US equity futures edged higher on Friday, but there is likely to be caution ahead of the weekend and USD/JPY was held around 107.15.

The UK labour-market data caused an element of initial confusion with headline data stronger than expected, but the underlying data caused significant concern with declines in payrolls and hours for June. With further announcements of job losses, there were concerns that underlying unemployment would continue to increase and trigger a sharp rise in headline unemployment later in 2020. There were also expectations that the Bank of England would have to ease monetary policy further.

Sterling moved lower following the data, but gradually regained some ground later in the day. The currency was supported by expectations of very accommodative monetary policies from the Federal Reserve and ECB. GBP/USD edged above 1.2600, but equity markets were lower and unease over brittle risk conditions limited support with a retreat to near 1.2550 while GBP/EUR settled around 1.1010 on Friday.

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