Risk appetite held steady on Thursday as markets monitored US fiscal developments.

Risk appetite held steady on Thursday as markets monitored US fiscal developments. There was a notable slide in Asia on Friday with no fiscal headway while President Trump testing positive for coronavirus also created major waves.

The dollar regained ground as risk appetite deteriorated, but faded quickly amid choppy trading as US political uncertainty intensified. Euro gains also faded after the EU rejected claims that a trade deal was close.

Sterling was subjected to high volatility amid conflicting EU/UK trade rumours, eventually posting significant losses with no trade breakthrough. Commodity currencies also surrendered net gains as risk appetite deteriorated.

The final Euro-zone PMI manufacturing index was unchanged from the flash reading at 53.7 from 51.7 the previous month with the Spanish index returning to expansion for the month.  The Euro-zone unemployment rate increased to 8.1% for August from 8.0% previously and in line with market expectations.

The Euro gained ground briefly following speculation that the UK and EU were poised to strike a trade deal, but gains faded quickly as these report were denied. From highs at 1.1770, the Euro retreated to below 1.1750 with Euro-zone coronavirus developments also unsettling confidence in the single currency.

Initial US jobless claims declined to 837,000 in the latest week from a revised 873,000 the previous week and just below consensus forecasts of 850,000. Continuing claims declined to 11.77mn from 12.75mn the previous week, although overall claims, including pandemic assistance, rose in the week to September 12th.

The ISM manufacturing index retreated to 55.4 for September from 56.0 the previous month and slightly below consensus forecasts of 56.2. There was a monthly slowdown in production and new orders growth, although the rate of expansion was still robust. There was only a slight decline in employment for the month while prices increased at a faster pace. The overall data was impact was limited with both the Euro and dollar struggling for traction and EUR/USD settled around 1.1740.

Risk appetite was more fragile on Friday which triggered renewed dollar backing and EUR/USD dipped below the 1.1700 level before recovering ground. The latest US employment report will be released on Friday, although the overall impact is liable to be limited unless there is a huge miss and decline in payrolls.

The dollar was again held in relatively narrow ranges during Thursday’s European session with USD/JPY support below 105.50, but little in the way of headway.

Markets continued to monitor the prospects for a US fiscal stimulus agreement and there were several meetings between House Speaker Pelosi and Treasury Secretary Mnuchin, but no agreement on a package. The House passed a $2.2trn fiscal package, but there was support from the Senate and overall talks remained stalled.

In Asian trading on Friday, White House advisor Hicks was confirmed as testing positive for coronavirus and that President Trump had entered quarantine.

Overall risk appetite was more fragile following the reports, especially given a lack of progress on a fiscal stimulus.

At the European open, it was announced that Trump had tested positive for Covid which triggered a further sell-off in equity futures. The yen gained renewed defensive support as USD/JPY traded below the 105.50 level. The US currency then tended to lose wider support and USD/JPY dipped to test the 105.00 level.

Economic data had little impact as political and political and trade considerations dominated. The UK currency declined sharply following reports that the EU would launch legal proceedings against the UK over the Internal Market Bill. EU Commission President Von der Leyen confirmed that the EU had sent a formal notice over a breaking of good faith over the Withdrawal Agreement. The UK government has one month to respond. After declined sharply, Sterling stabilised given that trade talks will be crucial.

Sterling then spiked higher ahead of the New York open following reports that the UK and EU had found a landing zone for on the issue of state aid. There was only one reported source for the breakthrough and EU officials subsequently denied that there was a potential landing zones for the level playing field or fisheries and dismissed the reports as UK spin. GBP/USD traded in a wide range of over 150 points as volatility intensified with a peak near 1.2980.

Economic Calendar

10:00Euro-Zone CPI (M/M)(OCT)--
11:00ECB Luis De Guindos Speaks--
13:30USD Average Hourly Earnings (M/M)(SEP)-0.40%
13:30USD Average Hourly Earnings (Y/Y)(SEP)-4.70%
13:30USD Non-farm Payrolls(M/M)(SEP)-1371K
13:30USD Private Nonfarm Payrolls (SEP)-1027K
13:30United States Unemployment Rate(M/M)(SEP)-8.40%
14:00FOMC Harker Speech--
14:30FOMC Harker Speech--
15:00USD Factory Orders(AUG)1.30%6.40%
15:00USD Michigan Consumer Sentiment(SEP 01)-78.9

*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.