Sterling was resilient despite a lack of positive rhetoric over UK/EU trade talks with a stronger than expected retail sales print.

Risk appetite was cautious on Thursday amid US coronavirus reservations. US-China tensions were also a significant factor in undermining risk appetite. US equity markets moved sharply lower with a Nasdaq decline of close to 2.4%. Asian equity markets also lost ground as China tensions remained a significant factor.

The dollar struggled to gain support despite the more defensive risk tone and dipped to 21-month lows on a trade-weighted index before a slight recovery. EUR/USD strengthened to 18-month highs above 1.1600 before correcting slightly.

Sterling was resilient despite a lack of positive rhetoric over UK/EU trade talks with a stronger than expected retail sales print. The yen and Swiss franc gained support from underlying risk concerns. Commodity currencies surrendered gains as equity markets retreated and coronavirus unease increased.

The Euro was unable to make headway ahead of the New York open with pressure for a correction after recent gains. The US dollar was also able to an element of support and EUR/USD dipped to just below 1.1550 as commodity currencies faltered.

US initial jobless claims increased to 1.42mn in the latest week from 1.31mn the previous month and above consensus forecasts of 1.30mn. Continuing claims, however, declined to 16.2mn from 17.3mn previously. When including Federal assistance, the latest data for the week ending July 4th recorded a decline in the total number of people receiving benefits to 31.8mn from 32.0mn the previous week. Fiscal policy was also a significant focus with further Republican bickering within the Senate over the next stimulus plan and little chance that legislation will be in place before the end of July when some unemployment benefits are due to expire.

Euro-zone consumer confidence edged lower to -15.0 for July from -14.7 previously and below consensus forecasts of -12.0 which will create some uncertainty over the outlook for consumer spending. The latest PMI business confidence data will be released on Friday which will be important for sentiment.

Overall risk appetite was weaker in New York, but the dollar struggled to gain significant support despite the decline in equities. EUR/USD strengthened to 18-month highs around 1.1625 before a limited correction. The US currency gained only slight protection from the weaker risk tone with EUR/USD above 1.1600 on Friday.

The yen was able to hold steady into the New York open with narrow ranges prevailing as USD/JPY consolidated around the 107.10 area. As risk appetite dipped in US trading, the Japanese currency secured renewed support with USD/JPY retreating to around 106.80 as the yen regained some support.

Markets remained uneasy over US coronavirus developments with the US reporting over 1,100 deaths for the third successive day and a daily increase in cases of over 70,000. Treasury Secretary Mnuchin stated that the dollar is the world’s global currency and we’re going to protect it by keeping the currency stable, but there was no significant recovery after the comments as underlying dollar confidence remained weak.

There were further concerns over US-China relations with tensions increasing further following comments from Secretary of State Pompeo that China is a threat to the economy and liberty. China also confirmed that the US consulate in Chengdu would be ordered to close. Risk appetite was more vulnerable in Asian trading with the Chinese market close to 3% lower and USD/JPY dipped to 1-month lows below 106.50 with EUR/JPY around 123.50 as Tokyo markets remained closed for a holiday.

The CBI industrial orders index recovered to -46 for July from -58 previously, although this was below consensus forecasts of -37. Overall orders in the past three months declined at the fastest pace since October 1980, but companies expect order flows to improve over the next three months and the decline in export orders has slowed. Bank of England external member Haskel stated that he was concerned about the economy getting stuck and recovering only slowly with a further risk of undershooting the inflation target. The recovery path will also depend on unemployment trends and he also warned that re-opening too quickly won’t help the economy.

Following the latest round of EU/UK trade negotiations, EU Chief Negotiator Barnier repeated his criticism of the UK government, again claiming that it was unwilling to engage on key issues. He also stated that there no progress had been made on key issues such as fishing and state aid, although there had been some progress in other areas. Barnier added that the UK stance made a trade agreement at this point unlikely, but a deal was still possible and talks will continue.

Sterling reacted relatively calmly to the comments given no significant expectations of a breakthrough GBP/USD traded above 1.2700 with GBP/EUR edging higher to 1.1000 despite the dip in risk appetite. UK retail sales increased 13.9% for June, above consensus forecasts of 8.0% with the year-on-year decline held to 1.6% and core sales increased 13.5% for a 1.7% annual increase, although there was only a limited Sterling reaction with GBP/USD close to 1.2750.

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