Risk appetite recovered in European trading on Tuesday as rising government bond yields helped financial stocks, as well as lift the euro and the pound. US treasury yields also moved higher on expectations that the Fed will soon proceed with shrinking its bond portfolio. However, the US dollar was stuck in the doldrums for much of the session as investor caution ahead of the FOMC meeting and political uncertainty weighed on the currency.

The euro surged to a fresh high of $1.1711 today, breaking above the $1.17 level for the first time since August 2015. The single currency was bolstered by a jump in German bund yields, while much stronger-than-expected Ifo data from Germany further supported the euro.

The Ifo’s business climate index rose to a record high of 116.0 in July from an upwardly revised 115.2 in June. The figure was well above expectations of a decline to 114.9. The current conditions and expectations indices also both beat forecasts. The Ifo report described German business sentiment as "euphoric", adding that companies were the most satisfied with the current conditions since the country’s reunification. The data contrasts with the more disappointing PMI releases from yesterday.

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In an additional boost for the euro, the Greek government successfully completed the sale of five-year bonds to private investors – the first since 2014. The sale helped reduce the yield spread between periphery Eurozone government bonds and German bunds.

The pound was also buoyant on Tuesday, advancing to a one-week high of $1.3083. Apart from the weaker dollar, sterling benefited from data from the Confederation of British Industry that showed UK manufacturing output was at its highest since January 1995 in the three months to July, although new orders rose less than expected in July.

The Japanese currency fell back in today’s European session as risk sentiment improved but was also under pressure after the Bank of Japan’s June meeting minutes revealed that the two new board members who joined the Bank recently argued against an early withdrawal from the stimulus program.

The greenback was unable to find much support from rising US treasury yields, even as the yen experienced broad weakness today. US treasury yields were sharply higher on Tuesday as investors bet that the Fed will signal at its meeting tomorrow the possible start date of its balance sheet reduction. Traders will also be looking to see whether the Fed will be concerned about any persistent weakness in inflation.

Apart from Fed policy, Trump’s political woes were at the forefront of investors’ minds, and this continued to weigh on the dollar. However, the US currency got a late boost from a surprisingly strong consumer confidence data. The Conference Board’s consumer confidence index increased from a downwardly revised 117.3 in June to 121.1 in July, beating expectations of 116.5.

Other data out of the US included the S&P CoreLogic Case-Shiller 20-city home price index. The index was unchanged at an annual rate of 5.7% in May, which was slightly below forecasts of 5.8%.

The dollar firmed to around 111.50 yen after the consumer confidence data, but the dollar index remained not too far from the 13-month lows from earlier in the day, and last stood at 93.84.

In commodities, gold prices reversed lower as the dollar recovered and the yellow metal was trading at $1251.40 an ounce in late European session. Oil prices extended their gains following the latest move by OPEC to curb supply. WTI oil advanced to $47.38 a barrel, while Brent crude was up at $49.65 a barrel.

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