The dollar was able to secure a limited correction from 2-year lows on Tuesday after heavy selling during the previous few days, although sentiment remained weak.

The dollar was able to secure a limited correction from 2-year lows on Tuesday after heavy selling during the previous few days, although sentiment remained weak.

There was an element of position adjustment ahead of the Fed statement. The Euro also retreated to near 1.1700 amid some reservations over Euro-zone coronavirus developments before regaining ground.

The Swiss franc regained ground after Monday’s losses while a USD/JPY dip to 105.0 triggered some warning from Japan. US equities moved lower amid uncertainty over fiscal policy and earnings concerns.

Sterling secured net gains despite a lack of confidence in fundamentals with GBP/USD above 1.2900. Commodity currencies were mixed as the US currency pared losses with solid overall support.

There were some concerns over the Euro-zone coronavirus developments as German officials expressed unease over the latest infection developments, especially with other spikes in parts of France and Spain. The Euro was also vulnerable to a correction after strong gains over the previous few sessions.

US consumer confidence declined to 92.6 for July from 98.3 previously and below consensus forecasts of 94.6. There was a net improvement in the present conditions component, but expectations declined very sharply on the month. There was evidence of weaker confidence in states hit by the large number of coronavirus cases, but overall confidence in the labour market improved which will provide an element of relief over underlying trends.

The Richmond Fed manufacturing index strengthened to 10 for July from 0 the previous month with limited net increase in new and unfilled orders. There was, however, a further decline in employment and capital spending was weak while upward pressure on prices eased significantly.

Overall confidence in the US outlook remained fragile which hampered the US dollar. There were also expectations that the Fed would maintain a dovish stance at Wednesday’s policy meeting and potentially signal a move towards yield curve control at the September meeting. There was, however, limited short covering ahead of the statement.

EUR/USD corrected lower to the 1.1700 area as the dollar recovered some ground before settling around 1.1725 at the European close. There was little EUR/USD change around 1.1725 on Wednesday ahead of the Fed decision with markets monitoring comments on inflation targets.

US White House medical adviser Fauci stated that he was cautiously optimistic that a vaccine will be available by late autumn. The number of US deaths from coronavirus moved back above 1,000 for the latest 24-hour period, although the number of new infections slowed and the overall death rate has slowed to some extent.

Markets continued to monitor progress towards a fresh fiscal stimulus bill amid further wrangling in the Senate both within the Republican Party and with the Democrats. There was further disagreement over the level of support for the unemployed with liability protection also a key area of disagreement.

Overall, USD/JPY dipped to lows just below 105.00 before recovering slightly with declines in US equities limiting US currency support.

There were further concerns over US-China tensions, especially with reports that Hong Kong elections due in September, could be delayed.

There were comments from Japan’s Ministry of Finance that currency stability was important and that the market was being watched as a matter of urgency. Verbal intervention is likely to be stepped up if the yen continues to strengthen. Fitch confirmed Japan’s credit rating at A, but lowered the outlook to negative. Asian equity markets were mixed and the dollar was unable to secure any recovery on Wednesday as USD/JPY traded close to the 105.00 level.

The CBI retail sales index strengthened sharply to 4 for July from -37 and well above consensus forecasts of -27. Retailers were, however, uneasy over the prospects for August with a reading of -5 and there was a further decline in orders which will maintain underlying concerns over the outlook, especially in the non-essential sector.

The NIESR forecast a GDP contraction of 10.1% for 2020 before growth of 6.1% next year and expected unemployment to be near 10% by year-end. In this context it called for further labour-market support measures and criticised the move to end the furlough scheme at the end of October.

There were still underlying concerns surrounding trade negotiations with the EU, especially as little progress is likely in the next two weeks as the holiday season dominates. Sterling was able to make significant headway during the day despite fragile underlying sentiment.

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