Sterling remained under sustained pressure amid Brexit trade fears.

The dollar was held in tight ranges on Friday with a slightly more defensive global risk tone limiting potential selling. EUR/USD settled just below 1.1850 as ECB rhetoric had little overall market impact.

US equity markets edged lower, but futures secured net gains on Monday. Risk appetite secured a net improvement on fresh optimism over a coronavirus vaccine, although USD/JPY made no headway.

Sterling remained under sustained pressure amid Brexit trade fears with firmer risk conditions providing marginal relief. Commodity currencies were protected by the improvement in risk conditions.

The Euro was contained in narrow ranges into Friday’s New York open with the currency unable to gain any significant traction amid political reservations.

US consumer prices increased 0.4% for August following a 0.6% increase for July and above consensus forecasts of 0.2%. The year-on-year increase increased to 1.3% from 1.0%. Core prices increased 0.4% compared with market expectations of 0.2% with a year-on-year rate at a 5-month high of 1.7% from 1.6%. The inflation data had little impact, especially with the Federal Reserve targeting a short-term increase in inflation to above 2.0% as part of the new inflation framework.

The EU and UK Brexit trade row had some negative impact on the Euro during the day amid fears that there would be no free-trade agreement between the two countries. Ranges were still relatively narrow with EUR/USD settling just below 1.1850 and no further move to challenge the 1.1900 area.

CFTC data recorded no significant change in Euro positioning with longs close to record highs, maintaining the threat of liquidation if the Euro is unable to make headway.

ECB vice-President de-Guindos reiterated that the bank does not target the exchange rate, but that it is an important variable while President Lagarde repeated that the bank would assess incoming data, including the Euro carefully. Activity on Monday was curbed by caution ahead of Wednesday’s Federal Reserve policy meeting and a lack of fresh data. The dollar lost some traction amid a dip in potential defensive demand with EUR/USD close to 1.1850.

Chinese new loans increased CNY1,280bn for August from CNY993bn the previous month and slightly above consensus forecasts while M2 money supply growth slowed to 10.4% from 10.7% which maintained some reservations over the medium-term economic outlook.

US equities attempted to recover ground, although buyers lacked conviction and closed with slight losses which curbed potential dollar support and USD/JPY traded around 106.15 at the US close. The US Federal budget deficit came in at $200bn for August, below forecasts of $235bn, although the 11-month deficit increased to just over $3.0trn.

There was some relief on the coronavirus vaccine front with the AstraZeneca/Oxford trial resuming this week.

Chief Cabinet Secretary Suga confirmed that the Bank of Japan will maintain policy easing and he was confirmed as new LDP leader on Monday after the Japanese market close.

The Japanese monthly Tankan manufacturing index recovered to -29 from -33 previously with services at -18 from -23.. The US recorded a renewed increase in coronavirus cases, although US futures posted significant gains. Overall, USD/JPY was held close to 106.0 despite gains in equity markets.

Sterling secured only limited support from the UK and Japan free-trade agreement as underlying fears over EU developments remained the dominant focus.

Political developments dominated the UK currency with no let-up in tensions between the UK and EU amid the on-going row over the UK plan to make changes to the Brexit Withdrawal Agreement signed last year. The changes would have an impact on Northern Ireland customs arrangements and break international law.

The EU reiterated its threat to take legal action against the UK if the legislation was approved and also insisted that there could be no trade deal without full implementation of the Withdrawal Agreement. There was, however, some relief that there was no immediate move by the EU to walk out of trade talks.

The NIESR estimated that GDP increased 1.6% for August after the 6.6% increase for July with a further slowdown forecast for September at 0.9%. The three-month comparison would turn positive at 7.0% for August with the annual contraction at 10.2% from 11.7%. Sterling overall was still firmly on the defensive with 6-week GBP/USD lows below 1.2770 before a marginal recovery while GBP/EUR posted 5-month lows near 1.0770 before a limited correction.

CFTC data recorded a further increase in long, non-commercial positions in the week to September 8th. There may already have been a reversal, but with the risk of further short-term selling.

The House of Commons debate on the Internal Market Bill will be watched closely on Monday while risk trends will also have an important Sterling impact.

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