The EU failed to reach agreement on the EU recovery fund over the weekend.

The EU failed to reach agreement on the EU recovery fund over the weekend, but talks will continue on Monday amid hopes that progress was being made.

New US coronavirus cases continued to increase with the total death toll increasing to above 140,000. Equities were little changed on Friday with US futures retreating on Monday and mixed trends in Asia.

The dollar was able to gain some support on defensive grounds, but confidence in the US outlook deteriorated with the dollar index close to June lows. The Euro was resilient and EUR/USD advanced to 4-month highs just above 1.1450. Sterling remained under pressure amid a lack of confidence in the outlook with EUR/GBP at 2-week highs.

US housing starts increased to an annual rate of 1.19mn for June from 1.01mn the previous month and slightly above consensus forecasts while building permits increased to 1.24mn from 1.22mn, slightly below expectations. The University of Michigan consumer sentiment index declined to 73.2 for the provisional July reading from 78.1 and below market expectations of 79.0.There was a small decline in the current conditions index and larger decline for the expectations component.

Markets remained focussed on the EU Summit which convened in Brussels. There were no significant expectations that there would be progress on Friday which limited the potential for currency moves. Overall dollar demand was limited and EUR/USD found net support below the 1.1400 level and advanced to the 1.1430 area later in the New York session with a lack of conviction over pushing the Euro stronger.

CFTC data recorded a further increase in Euro long positions to near 2-year highs, increasing the potential for selling pressure if there is disappointment over the fundamental outlook and a reversal in speculative buying.

The dollar gained an element of support on defensive grounds amid unease over US coronavirus developments. The EU Summit was unable to make a breakthrough on Saturday and was extended into Sunday in an attempt to secure a compromise with EU. There was still opposition from the Netherlands and Austria, but differences have narrowed and talks will resume later on Monday. ECB Lagarde stated that an ambitious deal was better than a rushed one. EUR/USD held firm despite no agreement and traded at 4-month highs above 1.1450 in early Europe on expectations that a deal would be agreed with choppy trading likely later on Monday.

Coronavirus developments continued to have a significant impact on markets and unease over market trends continued, although overall currency moves were limited. Dallas Fed President Kaplan stated that the bank started to see a change in the high frequency data with the data stalling from the middle of June and businesses were concerned over the ability to survive. The IMF issued a very cautious report on the US outlook with concerns over the risks posed by coronavirus, especially in view of extremely high debt levels. There was also criticism of the trade and currency policies. US equities posted slight net gains on Friday with USD/JPY above 107.00.

The mayor of San Francisco announced that the re-opening plans would be suspended and there were further concerns over US developments. There were also further concerns over friction between state administrations and the Federal government. The total US death toll increased to over 140,000 and new cases have been over 60,000 for the past three days, increasing fears over a further increase and significant potential damage to the US economy which would also hurt global demand.

Asian equity markets were mixed with notable gains in China, but US futures lost ground. Japanese exports declined 26.2% in the year to June, maintaining unease over the outlook. USD/JPY overall made limited net headway to the 107.30 area from highs near 107.50 with the yen unable to gain defensive support.

Underlying confidence in the UK economic outlook remained fragile on Friday which continued to sap UK currency support. In during the day, Bank of England Governor Bailey stated that there was evidence of activity returning quite strongly in housing and car sales, but not in hospitality and entertainment. There was also further speculation that the Bank of England could move to engage in negative interest rates. Comments from officials will continue to be watched closely.

There were no major developments surrounding UK/EU trade talks with negotiations set to resume this week. Overall, GBP/EUR weakened to 2-week lows near 1.0948 before a limited correction to 0.9090 while GBP/USD was held below 1.2600, maintaining the trend of lower highs.

There were no significant changes in the CFTC data for the latest week with a slight decline in short non-commercial positions and scope for renewed selling if confidence dips. Confidence in the UK economy remained weak with no advance against the dollar while GBP/EUR again strengthened to 1.0950. If the EU can secure agreement on a recovery package there will be fears that the UK will lose out in relative terms. Friction with China will also hurt potential investment inflows.

Economic Calendar

Expected Previous
07:00 Germany CPI (Y/Y)(JUN) -2.10% -2.20%
07:00 Germany CPI (M/M)(JUN) - -0.40%

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