Risk appetite held firm with expectations of very supportive global monetary policies.

There were no major data releases during Monday with activity contained ahead of Wednesday’s Federal Reserve policy meeting. Risk appetite held firm with expectations of very supportive global monetary policies.

US equities posted solid gains on fresh hopes for positive coronavirus vaccine developments. The dollar recovered from lows on Monday, but lost ground again on Tuesday as risk appetite held firm.

EUR/USD challenged the 1.1900 level amid dollar vulnerability. Sterling was undermined by political fears, but recovered some ground overall as global risk appetite strengthened.

Euro-zone industrial production increased 4.1% for July, marginally above consensus forecasts, with the year-on-year decline slowing to 7.7% from 12.0%.

ECB chief economist Lane stated that there is no indication that the bank is hitting the lower bound in rates. There were, however, further doubts whether the central bank would be able to cut interest rates further, especially with negative rates already undermining the banking sector. Irish central bank Governor Makhlouf stated that it would be wise for the bank to plan on the basis that there won’t be a UK-EU trade deal. The Euro was hampered to some extent by unease over Brexit trade stresses.

The dollar lost ground amid the more confident mood in global equity markets, especially with increased merger activity.

There were also expectations that the Federal Reserve would adopt a dovish tone at this week’s policy meeting and strengthen forward guidance to reinforce market expectations that rates will be left at extremely low levels for a longer period. Expectations of very low yields continued to undermine dollar support.

EUR/USD was unable to make a challenge on the 1.1900 level and drifted lower later in the session as the dollar managed to regain some ground. There was a fresh loss of defensive dollar support on Tuesday as risk appetite improved and EUR/USD pushed towards 1.1900 as the Chinese yuan hit a 16-month high against the dollar. There will be further caution ahead of Wednesday’s Federal Reserve policy decision with risk trends important for the US currency.

There was no selling pressure on the yen following confirmation that chief cabinet Secretary Suga had won the election to become the new LDP leader.

US bond yields were little changed on the day and US equites posted strong gains, but the Japanese currency was notably resilient in the face of stronger global risk appetite. The US currency lost wider support and USD/JPY dipped sharply to 2-week lows near 105.50 before stabilising later in the session.

Chinese industrial production increased 5.6% in the year to August from 4.8% previously and above expectations of 5.1%. Retail sales edged back into positive territory with 0.5% annual growth, also slightly above consensus forecasts.

The Chinese data helped underpin confidence in the global economy and underpinned risk conditions. There was also a switch back towards optimism over coronavirus vaccine developments even though uncertainty continued. The dollar struggled to make any headway with USD/JPY around 105.65 in early Europe.

Sterling was underpinned by the firmer trend in global risk appetite during Monday, especially with increased merger activity. Markets continued to monitor EU/UK trade developments during the day and there were further concerns over deteriorating conditions. There were reports that the EU had delayed a decision on whether to grant EU access for UK-based Euro clearing houses next year, reinforcing fears of economic damage once the UK leaves the transition period.

The House of Commons debated the Internal Markets Bill with further unease from former Prime Ministers and reservations from Conservative MPs. Prime Minister Johnson looked to defend the legislation and stated that some EU demands were unreasonable and against the spirit of the Northern Ireland protocol. GBP/USD pushed to highs around 1.2920 before fading as underlying sentiment remained negative.

The UK government won the Internal Markets Bill second reading vote in the House of Commons with a majority of 77 and there will detail discussion over the next few days. There is still a high level of opposition to the bill with markets monitoring developments closely. Sterling reaction was limited with net support from firm global risk appetite.

The headline UK unemployment rate increased to 4.1% from 3.9%, in line with expectations. Early estimates suggested the number of employees on payrolls was 695,000 lower than March with a 74,000 increase in the monthly claimant count. Sterling edged higher as GBP/USD traded just above 1.2850 amid slightly better than expected data.

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