The dollar posted net gains with no evidence of anticipated month-end selling.

US PCE inflation data was slightly below consensus forecasts but failed to trigger a major reaction with potential growth trends in focus. US bond yields moved lower during the New York session.

Overall risk appetite was more fragile late last week, although the mood was more confident on Monday. Wall Street equities lost ground before infrastructure hopes boosted futures in Asia. Asian equities posted net gains on Monday led by a recovery n China.

The dollar posted net gains with no evidence of anticipated month-end selling. EUR/USD retreated to near 1.1850 before stabilising. Sterling lost ground with GBP/USD near 1.3900 amid some evidence month-end selling. Commodity currencies weakened as the US dollar strengthened.

The headline Euro-zone CPI inflation rate increased to 2.2% for July from 1.9% previously and above consensus forecasts of 2.0% while the core rate declined to 0.7% from 0.9% which was in line with market expectations. Unemployment declined to 7.7% for June from 8.0% and below market expectations of 7.9%.

Euro-zone GDP increased 2.0% for the second quarter of 2021, above market expectations of 1.5% and with a year-on-year increase of 13.7%.

The Euro initially held a firm tone, but EUR/USD was unable to sustain a break above the 1.1900 level and drifted lower into the New York open.

The US PCE prices index increased 0.5% for June with the year-on-year rate in line with consensus forecasts at 4.0%. The core rate increased 0.4% on the month compared with expectations of 0.6% with the year-on-year increase increasing slightly to 3.5% from 3.4% previously and below expectations of 3.7%.

Although the inflation data was slightly below expectations, the dollar edged stronger in an immediate response as underlying inflation expectations remained high.

The Chicago PMI index strengthened sharply to 73.4 for July from 66.1 the previous month and well above expectations of 64.6. There were further supply-side pressures and costs continued to increase at a rapid pace. There had been some expectations that the dollar would be sold into Friday’s London fix, but the US currency actually strengthened and EUR/USD dipped to near 1.1850 before stabilising.

CFTC data recorded a further net decline in long Euro positions to below 40,000 contracts in the latest week with the long dollar position increasing to the highest level since March 2020. The positioning data will make it more difficult for the US currency to generate further buying interest.
Narrow ranges prevailed on Monday with EUR/USD around 1.1870 after stronger than expected German retail sales data and ahead of the latest US manufacturing data.

Japan officially announced a state of emergency for four further prefectures and there were further concerns over increasing coronavirus cases. US equities lost ground during the day while bond yields edged lower. The dollar, however, was able to resist further selling and USD/JPY settled around 109.70.

China’s PMI manufacturing index edged lower to 50.4 for July from 50.9 previously and slightly below consensus forecasts while the non-manufacturing index retreated marginally to 53.3 from 53.5 previously. The data maintained an element of concern over Chinese economic trends with important global implications.

CFTC data recorded an increase in short yen positions in the latest week, increasing the potential for short covering of there is a further slide in risk appetite.

China’s Caixin PMI manufacturing index declined to 50.3 in July from 51.3 the previous month with the first decline in new business for 14 months. There was a slight easing of supply-side pressures for the month and pricing pressures also moderated.

US futures and Asian equities were able to make headway on Monday with USD/JPY around 109.65 and EUR/JPY just above 130.00.

There were no significant domestic developments during Friday with markets continuing to monitor risk conditions closely. GBP/USD was unable to challenge 1.4000 and there was significant selling after the Wall Street open with some evidence of month-end selling.

CFTC data recorded a slight net increase in short Sterling, non-commercial positions to over 5,500 contracts in the latest week, the largest short position since December 2020, potentially limiting the potential for further selling. The principal focus in the week ahead will be the Bank of England policy meeting. There is the possibility that some members on the committee will vote to curb bond buying at this meeting even though a majority of the committee is likely to be more patient.

Sterling was unable to make headway on Monday despite gains in equities with GBP/USD around 1.3900 as business confidence retreated.

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