Risk appetite was more fragile on Tuesday with on-going unease over coronavirus developments.

Risk appetite was more fragile on Tuesday with on-going unease over coronavirus developments. There were also further concerns surrounding Chinese market developments. US bond yields moved lower with real yields at record lows.

Wall Street equities lost ground with a 0.4% retreat for the S&P 500 index. Global equities also moved lower with further reservations over Chinese developments.

The dollar lost ground into the London fix with net losses to 10-day lows. EUR/USD posted renewed gains to above 1.1800 and held above this level. Sterling also posted strong gains into the London fix and resilient despite fragile risk conditions with GBP/USD around 1.3875. There was choppy trading in commodity currencies with net losses as equities retreated. Scandinavian currencies moved lower on fragile risk conditions.

Euro-zone M3 money supply increased 8.3% in the year to June from 8.4% previously while private loans increased 4.0% over the year from 3.9% previously. Narrow ranges prevailed ahead of the US open with the dollar initially posting further gains as EUR/USD retreated to lows around 1.1770. The dollar was, however, unable to sustain the advance and EUR/USD moved back to the 1.1800 area.

US durable goods orders increased 0.8% for June, below consensus forecasts of 2.1%, although the May increase was revised up to 3.2%. Underlying orders increased 0.3% after a 0.5% advance the previous month. The S&P Case Shiller US house prices index increased 2.1% for May with a year-on-year increase of 17.0% from 15.0% previously and the strongest reading since September 2004.

Consumer confidence edged higher to 129.1 for July from a revised 128.9 previously which was above market expectations and the strongest reading since February 2020. There was a small increase in the current conditions index while expectations declined marginally on the month.

The Richmond Fed manufacturing index edged higher to 27 for July from 26 previously with a further strong increase in new orders. There was a firm increase in employment while cost pressures intensified, although companies did expect pressures to ease slightly over the next few months.

There was choppy trading after the Wall Street open with evidence of month-end position adjustment and sharp dollar selling into the London fix which pushed EUR/USD to highs around 1.1840 before a correction to 1.1820. Narrow ranges prevailed on Wednesday ahead of the Federal Reserve policy decision with markets watching comments on the delta variant and tapering of asset purchases closely. EUR/USD was near 1.1815 with volatility set to increase later in the day.

After the European open on Tuesday, Bank of Japan Governor Kuroda stated that, as a result of the central bank’s 2% inflation target, Japan’s economy is no longer under deflation. The rhetoric provided an element of yen support, although global risk conditions dominated.

The Chinese yuan remained under pressure in early Europe with 3-month lows against the US dollar as Chinese and Hong Kong equities declined sharply for the second successive session. Overall risk conditions were also more vulnerable as US equity futures moved lower. In this environment, there was fresh defensive demand for the Japanese currency with USD/JPY dipping to test the 110.00 level.

Wall Street indices remained on the defensive and bond yields moved lower with USD/JPY weakening to lows around 109.60.

Asian equity markets remained on the defensive on Wednesday despite supportive comments from Chinese officials and overall risk conditions remained fragile as the yuan remained under pressure.

Overall, USD/JPY settled around 109.75 with EUR/JPY around 129.75 with equity-market trends watched closely.

The UK CBI retail sales index edged lower to 23 for July from 25 previously, but above expectations of 21. Retailers expect a stronger rate of sales growth for August and orders remained at high levels. The data helped underpin confidence in the spending outlook.

Sterling initially failed to make headway during the day, but it was resilient in the face of weaker equity markets. The UK currency also posted sharp gains into the London fix with evidence of month-end position adjustment. There was also further relief that the daily UK coronavirus cases continued to decline which offered some relief over potential recovery trends. GBP/USD strengthened to highs near 1.3900 while EUR/GBP rallied to around 1.1740.

The UK currency held at higher levels later in the day, but with no GBP/USD break of 1.3900.

Sterling was again resilient in the face of fragile risk appetite on Wednesday with GBP/USD consolidation around 1.3870 while GBP/EUR was around 1.1740.

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