Sterling lost ground as domestic coronavirus restrictions were tightened again.

Risk appetite dipped sharply in New York on Monday amid reservations over the near-term coronavirus outlook and sharp position adjustment. Wall Street equities posted significant losses, although futures stabilised on Tuesday. The dollar remained under pressure ahead of the New York open before recovering from 32-month lows amid weaker risk appetite.

There was underlying interest in selling the dollar on rallies, especially with expectations of a very supportive Fed policy. Tuesday’s US Georgia run-off created underlying caution. EUR/USD retreated to 1.2250 from 32-month highs just above 1.2300 before settling around 1.2270. Sterling lost ground as domestic coronavirus restrictions were tightened again and risk appetite dipped with sharp GBP/USD losses from 32-month highs at 1.3700.

Commodity currencies reversed course to post net losses, although Asian optimism supported the Australian dollar.

The final reading for the Euro-zone PMI manufacturing index was revised higher lower to 55.2 from the flash reading of 55.5. The Spanish and Italian PMI readings were also weaker than expected, reinforcing reservations over the near-term outlook and the services data will be notably weaker.

The dollar remained firmly on the defensive ahead of the New York open amid strong risk appetite and expectations that the very loose Federal Reserve policy would maintain negative real interest rates and lead to further inflows into other assets. The US currency dipped to fresh 32-month lows with EUR/USD posting 32-month highs just above the 1.2300 level as overall risk appetite also held firm.

The US PMI manufacturing index was revised higher to 57.1 for the final reading from the flash reading of 56.5 and the highest reading for over six years, although there was a slowdown in the rate of orders growth. Markets were less confident over the outlook for the services sector given coronavirus restrictions.

Risk appetite dipped after the Wall Street open with increased coronavirus restrictions in Scotland helping to increase fears over wider coronavirus developments.

The US dollar was able to secure a tentative recovery with a sharp retreat in commodity currencies helping to push EUR/USD to just below 1.2250.

There was no significant change in the latest CFTC data, maintaining the potential for a dollar correction stronger.

There were further concerns over euro-zone developments with Italy extending coronavirus restrictions until the middle of January. The dollar was unable to sustained gains amid a renewed advance in commodity currencies with EUR/USD around 1.2270 in early Europe and further choppy trading is likely as markets monitor US political developments.

The dollar remained under pressure in early Europe on Monday with wider US losses continuing to sap support and USD/JPY hit 9-month lows near 102.70. A wider recovery pushed USD/JPY back above the 103.0 level as the yen secured only limited fresh support despite the slide in equities.

There was a significant element of uncertainty surrounding the Georgia run-off elections on Wednesday which will determine which party has control of the Senate.

Chicago Fed President Evans stated that in springtime the Fed will be better positioned to know what more may be needed. He stated that an overshoot in inflation to 2.5% would be helpful, but the central bank would be talking about adjusting its stance if inflation headed towards 3.0%. Cleveland head Mester stated that stronger growth this year would not require a policy change as the economy would still be far from the Fed’s employment and inflation goals.

The Chinese central bank fixed the yuan sharply stronger on Tuesday with a gain of over 1% from the previous day which was the sharpest daily move since 2005. The stronger yuan was important in undermining support for the US currency, although the yuan faded later in the session with USD/JPY just below 103.00.

The final reading for the UK PMI manufacturing index increased slightly to 57.5 from the flash reading of 57.3 as stock building ahead of the UK leaving the EU single market boosted the index and delivery times increased. Mortgage approvals increased to near 105,000 for November from 98,300 previously and the highest reading for over 13 years. There was, however, a further repayment of consumer credit with the annual decline of over 6%, the highest rate since the data series started in 1994.

GBP/USD just above 1.3700, but GBP/EUR gradually moved lower. The UK currency was unable to make further headway and losses accelerated after the New York open, especially after tighter coronavirus restrictions were announced for Scotland. It was also announced that there would be further measures in England which further undermined confidence and a slide in risk conditions also sapped confidence. GBP/USD dipped to near 1.3550 while EUR/GBP pushed to highs near 0.9050 before correcting slightly.

Global risk conditions recovered on Tuesday which provided an element of Sterling support with a GBP/USD move towards 1.3600 and GBP/EUR around 1.1080.

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