Sterling was undermined by the announcement of a national lockdown across England which offset evidence of progress in trade talks.

Risk appetite has remained fragile amid global coronavirus reservations as cases continued to increase and uncertainty over the US election. US equities moved lower, although markets stabilised on Monday with some support from solid Chinese data.

The dollar held a firm tone with net gains fuelled by defensive demand amid fragile equity markets and growth concerns. The Euro was undermined by recovery fears and further expectations of ECB easing with EUR/USD near 4-week lows below 1.1650.

Sterling was undermined by the announcement of a national lockdown across England which offset evidence of progress in trade talks. Commodity currencies drifted lower after initial gains amid fragile risk appetite and US gains.

German GDP increased 8.2% for the third quarter of 2020 following a 9.8% decline previously and above consensus forecasts of 7.3%, although still with a 4.1% annual contraction. Italian GDP also posted a 16.1% increase for the quarter, well above expectations of 11.2%. For the Euro-zone as a whole, GDP increased 12.7% compared with consensus forecasts of 9.5%, but there were strong expectations that there would be a weaker performance for the fourth quarter.

The Euro-zone CPI inflation rate was unchanged at -0.3% for October, in line with consensus forecasts, and the underlying rate was also unchanged at 0.2%.

The US core PCE prices index increased 0.2% for September with the year-on-year rate edging higher to 1.5% from 1.4%, but below consensus estimates of 1.7%.

The Chicago PMI index declined only slightly to 61.1 for October from 62.4 and was above consensus forecasts of 62.4.

There were further concerns surrounding Euro-zone coronavirus developments, although there were also further concerns over US trends as the number of new cases increased to a record high of close to 100,000. The dollar overall strengthened to fresh 4-week highs with a renewed increase in defensive demand.

EUR/USD was unable to hold its gains after briefly touching the 1.1700 area and gradually lost ground during the day with a retreat to just below 1.1650.

CTFC data recorded a further limited decline in long Euro positions to 156,000 in the latest week from 166,000 previously, but the Euro will still be vulnerable to a liquidation of long positions. The single currency remained under pressure on Monday amid further fears over coronavirus developments and traded near 1-month lows below 1.1650.

During Friday, US 10-year yields moved to the highest level since June which provided an element of dollar support during the day and USD/JPY edged higher to the 104.70 area despite speculation that the Federal Reserve could expand bond purchases to cap yields.

There was inevitable caution ahead of this week’s US Presidential election. Latest opinion polls continued to suggest that Biden had a firm lead at the national level, although some state polls in key states were extremely close which maintained an important element of uncertainty with market unease over a delayed outcome.

Markets tended to assume that the US dollar would weaken if the Democrats secured a clean sweep, but there was notable caution over aggressive position taking.

China’s manufacturing PMI index declined marginally to 51.4 from 51.5 and close to consensus forecasts while the non-manufacturing index strengthened slightly to 56.2 from 55.9 which provided an element of reassurance over trends within the economy and the Caixin manufacturing index strengthened to 53.6 from 53.0 previously.

The yuan strengthened significantly on Monday, although the US dollar overall was resilient as USD/JPY traded around the 104.75 area.

Unofficial reports on Friday suggested that EU/UK trade talks had made headway with further drafting of legal texts, but there were still differences, especially in the area of fishing. Trading ranges were relatively narrow given the high degree of uncertainty with expectations that there would be a trade deal providing some protection.

GBP/USD failed to challenge the 1.3000 level and retreated to below 1.2950, although GBP/EUR  rallied to 7-week highs just above 1.1110. CFTC data recorded a net increase in short Sterling positions to 7,000 contracts in the latest week from 2,000 previously which suggested little enthusiasm for buying the UK currency.

On Saturday, UK Prime Minister Johnson announced that England would be placed in a 4-week lockdown from November 5th in order to slow the increase in coronavirus cases. It was also announced that the furlough job protection scheme would be extended until the end of November.

There will be further upward pressure on government borrowing and increased pressure for the Bank of England to take additional action at this week’s policy meeting which undermined Sterling sentiment.

Late on Sunday, there were reports that negotiators were close to breaking the impasse over fishing, but Sterling failed to gain support, especially with fears that coronavirus lockdown measures would have to be extended.

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