Sterling was resilient despite underlying uncertainty with an element of optimism that trade talks would make progress this week.

Gains in US equities secured net gains late on Friday and futures made tentative net gains in Asia, although global bourses were subdued. The firm tone in equities helped underpin risk appetite even though caution still prevailed.

The dollar gained net support on Friday, especially with unease over European developments, with a slight retreat from 2-month highs on Monday. EUR/USD declined to fresh 2-month lows at 1.1610 before a slight recovery.

Sterling was resilient despite underlying uncertainty with an element of optimism that trade talks would make progress this week. Commodity currencies recovered from Friday’s intra-day lows as the US dollar faded slightly.

Euro-zone money supply growth slowed to 9.5% in the year to August from 10.1% previously and below consensus forecasts of 10.2% while private loans increased 3.0% over the year. The ECB will remain committed to a very expansionary monetary policy over the medium term.

There was further unease over Euro-zone coronavirus developments with pressure for restrictions to be tightened in Madrid as new cases continued to increase. According to sources, Italy would raise its 2021 GDP growth forecast, but also raise the 2020 debt/GDP ratio to 160% with the aim of lowering this to 156% on 2021.

US durable goods orders increased 0.4% for August compared with consensus forecasts of 1.5%, although there was an upward revision to 11.7% for July. Underlying orders increased 0.4%, also below expectations, although non-defensive orders were firmer. There were fresh doubts over the underlying US recovery trend.

EUR/USD declined to fresh two-month lows just above 1.1610 before correcting slightly to 1.1630 as the dollar overall secured the strongest weekly advance since April.

CFTC data recorded a renewed increase in long, non-commercial Euro positions to near record highs, increasing the threat of position capitulation if the single currency retreats further in the short term.

Over the weekend, ECB Council member Visco stated that Euro strength is worrying because it generates downward pressure on prices at a time when inflation is already low. Bank President Lagarde is due to make comments on Monday with rhetoric watched closely.

Dollar demand eased slightly on Monday as risk conditions improved slightly and it traded just below 2-month highs with EUR/USD close to 1.1630 as caution still prevailed.

Risk appetite strengthened into Friday’s New York close with US equities making net gains. The dollar held a firm overall tone and USD/JPY strengthened to around 105.60 against the Japanese currency with the yen unable to gain further support on the main crosses.

There was an easing of coronavirus restrictions in Florida with political developments inevitably having an important impact on overall market sentiment. The first Presidential debate will be held on Tuesday which may have an impact on the election race and markets remain uneasy over the threat of chaos after the November vote if there are disputed results. As expected, President Trump nominated Amy Coney Barrett to fill the vacant Supreme Court position, reinforcing political stresses.

CFTC data recorded a net increase in long yen positions to equal 3-month highs, maintaining the potential for yen selling if global risk appetite strengthens.

Japanese chief secretary Kato stated that the government will not hesitate to take additional support measures if needed, although USD/JPY drifted to the 105.30 area.

Although there was a relatively positive response to Chancellor Sunak’s Job support scheme, there were expectations that further support would be needed.  In this context, Sterling failed to sustain rallies on Friday with sentiment undermined by further speculation that the Bank of England could adopt negative interest rates.

Coronavirus developments remained a negative influence with new cases continuing to increase while around 25% of the country is now under restrictions. There was further speculation that there would be additional measures in London and across the North of England. Late in Friday’s European session, EU sources stated that it was time to commit to key elements of the UK/EU trade deal, dampening optimism that rhetoric had been more encouraging.

There was no significant change in Sterling positioning for the latest week with a slight long position, maintaining the potential for selling if sentiment slides. Fitch maintained the UK credit rating at AA- with a negative outlook. Over the weekend, Bank of England MPC member Tenreyro stated that the evidence of negative interest rates had been encouraging with a reduction in interest rates charged by borrowers while lenders had adapted well.

Trade tensions will inevitably remain high with the key round of talks due to be held in Brussels this week and GBP/USD edged higher on Monday to near 1.2770.

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