Risk appetite fragile on Friday amid reservations over US-China relations and further US political interference.

Risk appetite was more fragile on Friday amid reservations over US-China relations and further US political interference. US equities lost ground on Friday and global markets overall were lower as US futures moved lower on Monday.

A more defensive risk tone provided an element of defensive dollar support, although underlying US sentiment remained weak. EUR/USD drifted lower on Friday before trading above 1.1850 on Monday.

The yen maintained a firm tone with USD/JPY close to 7-week lows. Sterling lost ground again amid the more vulnerable risk mood, political risks and unease over domestic coronavirus developments.

The Euro-zone July current account surplus declined to EUR16.6bn from EUR20.7bn the previous month while the 12-month surplus increased to EUR259bn and 2.2% of GDP. The structural current account surplus will remain a significant underlying factor over the medium term.

Italian industrial orders increased 3.7% for July to give a year-on-year decline of 7.2% from 11.6% previously, but coronavirus concerns persisted.

The US second-quarter current account deficit widened to $170.5bn from a revised $111.5bn previously and above market expectations of $158bn. This was the widest quarterly deficit for over 11 year, reinforcing underlying US dollar vulnerability, especially given the contrast with a substantial Euro-zone surplus.

The University of Michigan consumer confidence index strengthened to 78.9 for September from 74.1 previously and above market expectations of 75.0. There were net increases for the current conditions and expectations components for the month. There was, however, speculation that the recovery momentum is slowing some high-frequency indicators such as the number of diners at restaurants have started to decline once again.

The dollar regained some ground late in the day amid a fragile risk tone, although overall progress was limited with EUR/USD around 1.1830.

CFTC data recorded a decline in long, non-commercial Euro positions to 179,000 contracts in the latest week from 198,000 previously, although there is still scope for further Euro selling if market sentiment shifts. In particular, there will be concerns over Euro-zone coronavirus developments.

The dollar was unable to make headway on Monday with further gains for the Chinese yuan supporting the Euro as EUR/USD edged towards 1.1870.

The dollar continued to lose ground on Friday, especially with markets continuing to fret over US-China tensions as President Trump looked to block WeChat access in the US. Wall Street equity markets lost ground and USD/JPY retreated to 7-week lows around 104.30.

Wall Street indices closed above intra-day lows with USD/JPY just above 104.50 as the yen held a firm tone on the crosses.

There was some evidence that the White House was encouraging Senate Republicans to concede ground on a fiscal stimulus Bill, but no definitive developments and political tensions remain high.

US futures moved lower on Monday, but the dollar was unable to gain ground and was held close to 7-week lows against the Japanese currency. USD/JPY traded around 104.30 with Tokyo closed for a holiday. The yen overall maintained a strong tone amid very low global yields and EUR/JPY was below 124.0. Although Japanese markets will remain closed on Tuesday, there will still be scope for Japanese Finance Ministry warnings against volatile markets and implicit warnings against yen strength.

Sterling secured only limited support from Friday’s retail sales data amid unease that the recovery in demand would stall. It was undermined by underlying ease over the Brexit situation as further areas in England were put under tougher restrictions and there was further speculation that the whole of the country could be put under a short-lived lockdown. The UK overall recorded the highest number of new infections of over 4,300 on Friday, the highest number for four months.

Late on Friday there were indications that the EU would still find the UK Internal Market Bill as unacceptable despite proposed changes. CFTC data recorded a decline in long Sterling positions to 2,000 contracts from 13,000, indicating that longs had been cut following the slide in spot prices, but there is still scope for hedge-fund selling.

There were reports that Chancellor Sunak would extend business support plans while Rightmove reported a 5.0% annual increase in house prices with increased transactions fuelled by tax cuts. The latest BDO manufacturing survey reported a slow recovery. Sterling was unsettled by coronavirus fears with GBP/EUR around 1.0900 on Monday with GBP/USD close to 1.2950 amid a fragile US dollar.

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