UK manufacturing struggles.

The German IFO business confidence index retreated to 88.6 for July from a revised 92.2 previously which was lower than consensus forecasts of 90.2 and the lowest reading since June 2020. The current assessment index declined to 97.7 from 99.4 in June while the expectations index dipped sharply to 80.3 from 85.5 with both readings below market expectations.

The IFO commented that uncertainty among companies has increased significantly, and recession is knocking at the door with the risk continuing to increase if current developments continue.

Gazprom announced that there would be a net reduction in supplies to around 20% of capacity from 25% seen since last week’s restart.

Supplies at this level would make it extremely difficult for Germany to build up sufficient supplies to meet demand during the winter with expectations that emergency programmes will be put into effect to curb demand.

The Euro dipped lower after the German IFO data and there were important reservations over gas supplies.

The Euro was, however, broadly resilient and EUR/USD managed to trade above the 1.0200 level on Tuesday as lower yields limited dollar support.

The UK CBI industrial orders index declined to 8 for July from 18 previously and below consensus forecasts of 13. Output increased at a slower rate in the quarter and business confidence deteriorated again while there was a slight easing of cost pressures and investment intentions were slightly stronger.

The second-quarter Australian CPI data will be released on Wednesday with expectations that prices will increase 1.9% after a 2.1% increase the previous quarter. Underlying prices are forecast to increase 1.5% from 1.4% previously.

The data will be important for Reserve Bank policy expectations.

The Euro pushed sharply higher at the European open on hopes that Russian gas supplies to Germany would be increased. EUR/USD peaked just above 1.0250 as the US dollar retreated further. US data was sparse, although a steeper contraction in the Dallas Fed manufacturing index reinforced concerns over the outlook. EUR/USD dipped sharply after Gazprom announced that Nord-Stream gas supplies would be cut. EUR/USD did find support close to 1.0200 and traded around 1.0225.

Rhetoric from new Bank of Japan members had little impact. US yields edged higher during the day with the 10-year yield just below 2.80% which limited dollar support. USD/JPY secured a limited net advance to 136.50 on Tuesday.

The Swiss franc lost ground as risk conditions attempted to stabilise. USD/CHF posted a net advance to near 0.9650 with EURCHF gaining to 0.9860.Sterling managed to post net gains on hopes that the UK could out-perform the Euro area. GBP/USD traded just above 1.2050 with GBP/EUR rallying to 1.1800.

Commodity currencies posted net gains on a slightly softer US dollar. AUD/USD settled around 0.6965 on Tuesday ahead of the CPI data. USD/CAD dipped to lows around 1.2835 as oil prices recovered ground.

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