The Bank of England tone was more hawkish than expected, but Sterling failed to draw any support and dipped to 2-week lows.

Risk appetite remained slightly more fragile on Thursday amid coronavirus reservations in the US and China, although ranges were narrow.

The dollar secured net gains with EUR/USD losing ground to 1.1200 amid expectations that no significant progress would be made on the EU recovery fund.

The Bank of England tone was more hawkish than expected, but Sterling failed to draw any support and dipped to 2-week lows before a marginal recovery.

The Euro was unable to gain any support ahead of the New York open and gradually lost ground and the dollar gained an element of support as global equity markets moved lower. The ECB announced that Euro-zone banks took-up EUR1.3trn in the first TLTRO auction under more favourable terms which helped curb bond yields. There were comments from German officials that real negotiations on the EU recovery fund would start next week, dampening expectations of progress at this week’s Summit.

The US Philadelphia Fed manufacturing index recovered strongly to 27.5 for June from -43.1 the previous month and well above consensus forecasts of -23.0. Shipments and new orders also strengthened sharply on the month with a smaller than expected recovery in unfilled orders. There was a further decline in employment, although job losses were at a slower pace with a small increase in costs for the month. There was also a further strengthening in the 6-month outlook.

Initial jobless claims declined slightly to 1.51mn in the latest week from 1.57mn the previous week and above consensus forecasts of 1.30mn. Continuing claims were also above consensus forecasts at 20.54mn from 20.61mn the previous week.

Overall risk conditions were slightly more fragile which limited potential dollar selling and commodity currencies also drifted lower with EUR/USD retreating to the 1.1200 area. The Euro was only just above this level on Friday with markets monitoring the EU Summit meeting during the day.

Risk appetite was generally fragile ahead of the New York open which continuing to underpin the Japanese currency. USD/JPY briefly moved back above the 107.00 level before fading once again. US equities were held in relatively narrow ranges and the dollar settled close to 106.85.

There were further concerns over US coronavirus developments with further increases in the states of Texas, Florida and Arizona. For the US as a whole, there was an increase in cases of 1.2%. Another round of tough rhetoric on China from President Trump did little to reassure markets.

The overall Fed balance sheet declined slightly in the latest week to $7.14trn from $7.22trn, the first decline since February as swaps with global central banks declined sharply. The slower overall balance sheet expansion will tend to provide some underlying dollar support.

There was evidence of increased capital outflows from Japan into US high-yield assets. The Japanese government upgraded its assessment of the economy for the first time since January 2018 and Tokyo has lifted all restrictions on businesses. Equity markets edged higher and USD/JPY settled little changed around 106.85.

Sterling steadily lost ground ahead of the Bank of England policy decision with underlying weak sentiment and GBP/EUR tested the 1.1100 level. The bank held interest rates at 0.1%, in line with consensus forecasts and there was a further £100bn increase in the asset-purchases ceiling to £745bn. This was also in line with expectations, but chief economist Haldane voted against the increase. The bank also expects to slow the rate of bond purchases significantly over the remainder of 2020.

The committee stated that the economic outlook was less severe than expected at the May meeting with second-quarter GDP likely to register a 20% contraction, although there was still a high degree of uncertainty over the outlook with particular concerns over the labour market. Governor Bailey stated that negative rates and yield-curve control had not been discussed and that bond-buying could slow given that financial markets were calmer. Sterling rallied initially but selling quickly resuming as markets were sceptical over the bank’s stance and selling continued with a GBP/USD slide to 1.2400.

UK consumer confidence recovered slightly to -30 from -36 according to the preliminary June reading. Retail sales recovered strongly in May with a 12.0% increase following an 18.1% decline previously and well above consensus forecasts of 5.7% with a 13.1% annual decline. Government borrowing increased to a record £54.5bn from £47.8bn previously.

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