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Modest Bout Of Risk Aversion Sees Sterling Move Off Highs


The dollar moved further away from last week’s lows yesterday, with cable drifting back below the $1.39 threshold and EUR/USD holding in the lower half of the $1.18-1.19 range. The move coincided with a modest deterioration in risk appetite, which was reflected in a further sharp fall in global bond yields. US 10-year Treasury yields plunged by 5 basis points (.05%) to 1.18%, while 10-year UK Gilt yields fell by 4bps to 0.53%. It is difficult to attribute the action to one factor. More data pointing to a slowdown in Chinese activity released over the weekend, comments from a Fed official last Friday that poured cold water on the prospect of the Fed tapering its asset purchase programme in September and the ongoing spread of the delta variant in China all represented headwinds to sentiment.

Data-wise, the US manufacturing ISM for July pointed to a further deceleration in US economic activity at the beginning of Q3, with the figures suggesting that the peak of the US manufacturing cycle may now have passed. The headline index dipped from 60.6 to 59.5, its lowest level since January, while new orders fell from 66.0 to 64.9. Interestingly, the prices paid subcomponent also dropped sharply from 92.1 to 85.7, indicating that the strong goods price inflation that we have seen in the year-to-date may now be beginning to ease. Turning to the day ahead, there is a very quiet macro schedule, but a slip in Asian equity markets overnight suggests that the greenback could remain reasonably well supported as investors remain in a cautious mood.


There was little out to influence sterling yesterday, though the currency did dip slightly as investor sentiment strengthened. This was reflected in GBP/EUR briefly testing below €1.17, well away from last week’s highs near €1.176. In addition to the move further out the yield curve, we also saw 2-year UK Gilt yields fall by an additional 2bps to just 0.05%, having traded up at 0.11% last Thursday. This suggests that markets are primed for a relatively dovish outcome to Thursday’s BoE policy meeting. In the more immediate future, however, a barren UK macro calendar indicates that sterling could continue to struggle for direction. UK Covid data have also shifted off the agenda as cases have continued to fall, a development that will help economic activity pick back up in August as the drag from the ‘pingdemic’ fades.


The euro also generally traded listlessly through yesterday’s session, reflecting the quiet schedule. There were a number of lower-tier releases in the eurozone over the past 24 hours, including German retail sales (+4.2% m-o-m vs forecast +2.0%) and the Italian manufacturing PMI (60.3 vs forecast 61.5). The strong print in the former was a function of re-opening effects as German continued to loosen restrictions in the month, while the latter reflected the fading impact of catch-up effects as activity in the manufacturing sector looks to have peaked at a global level. As elsewhere, there is a subdued look to the eurozone macro calendar today. As a result, shifts in sentiment will remain the primary driver of the action.

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