Risk appetite strengthened into Wednesday’s European close amid fresh hopes for a fiscal stimulus package.

Risk appetite strengthened into Wednesday’s European close amid fresh hopes for a fiscal stimulus package. Wall Street equities were jolted by fresh setbacks for stimulus talks and negative vaccine news, but still posted net gains.

Asian markets were subdued with China and Hong Kong closed for holidays. The dollar dipped lower into the London fix and overall traded with net losses.

EUR/USD found support close to 1.1700 and secured slight net gains to the 1.1750 area despite Euro-zone reservations. Sterling gained ground on position adjustment, reduced expectations of negative rates and hopes for progress in UK/EU trade talks. Commodity currencies strengthened as risk appetite firmed and the US dollar lost ground.

German unemployment declined 8,000 for September following a 9,000 decline the previous month and in line with consensus forecasts.

ECB President Lagarde stated that strategies on inflation should be examined, reinforcing expectations that the central bank would look to adjust its target over the medium term. ECB council member Villeroy also discussed a potential move to a symmetrical inflation target which could weaken the Euro, although the overall market impact was limited. EUR/USD moved lower into the New York open with a test of support just below the 1.1700 level as the dollar attempted to regain some ground. There were also expectations that there would be US currency buying into the month-end London fix amid choppy trading.

ADP data recorded an increase in private-sector payrolls of 749,000 for September after a revised 481,000 increase for the previous month and above market expectations of 650,000. The data should not have a major impact on expectations surrounding Friday’s employment report with solid growth expected.

The Chicago PMI index strengthened sharply to 62.4 for September from 51.2 previously, well above market expectations of 52.0 and the strongest reading since December 2018 with significant gains for all the components. There was also a further strong reading for pending home sales.

The Euro was able to post significant gains after the US open with EUR/USD highs above 1.1750 amid evidence of month-end position adjustment, but it drifted weaker into the European close. The dollar failed to gain sustained support as commodity currencies made further gains with the EUR/USD close to 1.1750 at Friday’s European open

The dollar made net gains into the US open amid wider gains, but USD/JPY stalled around the 105.80 area as the yen was able to resist further selling pressure despite solid gains in Wall Street indices. San Francisco Fed President Daly stated that the US economy is not out of the woods and that further fiscal support is needed.

There was fresh speculation over a fresh fiscal stimulus package which helped underpin risk sentiment, although there was still an important element of caution. In this context, equities dipped sharply later in the session following reports that there was still no agreement on a fiscal package.

There was an additional element of uncertainty as major airlines announced that substantial redundancies would take place unless wage subsidies are approved. Moderna stated that its vaccine would not be ready before the US election with the company not seeking FDA approval for any user groups until late November at the earliest.

Japan’s quarterly Tankan index recovered to-27 from -34 previously while the non-manufacturing index improved to -12, although both figures were below expectations and there was deterioration across small companies. The dollar was unable to make headway and USD/JPY traded just below 105.50 with Chinese markets closed for a holiday.

Bank of England Chief Economist Haldane stated that the economy faces uncertainties that are extraordinarily large and risks are skewed to the downside. He also stated that the prevailing economic narrative is unduly negative with positive news receiving less attention than it deserves.

As far as negative interest rates are concerned, he stated they could only be implemented if operational issues could be resolved, further stimulus was needed and the benefits of negative rates out-weighed the costs. According to Haldane, none of these conditions had been met yet and Sterling edged higher following the comments.

The UK currency secured further gains later in the day following the announcement that the UK had secured a fishing deal with Norway. The deal increased speculation that there would be a trade agreement with the EU with some anticipation of progress in crucial talks due to finish in Brussels on Thursday.

There was volatile trading associated with month-end positioning and GBP/USD pushed to highs near 1.2950 late in the European session while EUR/GBP also declined to lows around 0.9070. There was a correction weaker, especially another stark warning over the coronavirus situation from Prime Minister Johnson.

Economic Calendar

07:30CHF Retail Sales (Y/Y)(AUG)-3.60%
07:30CHF CPI (M/M)(SEP)0.00%0.00%
07:30CHF CPI (Y/Y)(SEP)-0.70%-0.90%
08:15Markit Mfg PMI(OCT)-50.9
08:30EUR German Manufacturing PMI (M/M)(OCT)-56.6
08:45Markit/ADACI Mfg PMI(SEP)-53.1
09:00Unemployment Rate(AUG)-9.70%
09:00Euro-Zone PMI Manufacturing(OCT)-53.7
09:30GBP PMI Manufacturing-54.3
10:00Euro-Zone PPI (Y/Y)(AUG)-2.70%-3.30%
10:00Euro-Zone PPI (M/M)(AUG)0.10%0.60%
10:00Euro-Zone Unemployment Rate(AUG)8.10%7.90%
11:00EU Leaders Summit--
13:30USD Initial Jobless Claims-870K
13:30USD Continuing Jobless Claims-12580K
13:30USD Personal Income (M/M)(AUG)-0.40%
13:30USD Personal Spending (M/M)(AUG)-1.90%
14:30FOMC Harker Speech--
15:00US Manufacturing ISM(M/M)(SEP)-56
20:00Fed Bowman speech--

*All rates shown are indicative of interbank rates and should only be used for indication purposes only. It is important to note that foreign exchange rates fluctuate and that rates may vary depending on the amount and the base currency that is purchased or sold. Rates are correct as of 8:00am UK time. CentralFX are not responsible for the rates shown.