The dollar lost ground as potential defensive demand faded and favourable risks conditions supported other global currencies.

Risk appetite held firm on Monday with fresh hopes for US fiscal support and relief over President Trump’s condition.

The dollar lost ground as potential defensive demand faded and favourable risks conditions supported other global currencies. EUR/USD advanced to highs near 1.1800 despite Euro-zone coronavirus reservations.

Sterling held steady as favourable global risk trends underpinned support with no major developments surrounding trade talks. Commodity currencies struggled to gain more than limited gains despite favourable risk conditions. The Australian dollar failed to make headway after the neutral Reserve Bank decision and dipped ahead of the budget statement.

The Euro-zone PMI services sector index was revised higher to 48.0 in the final reading from the flash reading of 47.6. The German figure was revised into expansion territory, although the sector overall was in contraction and there was a sharp decline for the Spanish services sector.

Markets remained uneasy over coronavirus developments given fresh restrictions in Paris and Madrid which will undermine activity, especially in the services sector.

The Euro-zone Sentix investor confidence index edged lower to -8.3 for October from -8.0 previously, although this was slightly above consensus forecasts of -9.5. Euro-zone retail sales increased 4.4% for August with a 3.7% annual increase from -0.1% previously and above consensus forecasts of 2.2%.

Bundesbank head Weidmann stated that the German economy appears to be V-shaped, although it is in fact becoming flatter.

The US PMI services-sector index was unchanged from the flash reading of 54.6 and slightly below the previous reading of 55.0. The ISM non-manufacturing index strengthened slightly to 57.8 for September from 56.9 previously and above consensus forecasts of 56.5. There were stronger readings for new orders and business activity while employment moved into positive territory for the month. The data had little overall impact as risk conditions and politics dominated.

The dollar overall lost support during the day amid a dip in potential defensive demand and EUR/USD strengthened to highs fractionally below the 1.1800 level. The US currency failed to make headway on Tuesday as overall risk appetite held firm with EUR/USD around 1.1780 as German industrial orders increased 4.5% for August.

Bank of Japan Governor Kuroda stated that the economy is in a severe condition, but picking up, while risks are to the downside. The comments continued to have little underlying impact on the Japanese currency as global risk conditions dominated. Low yields continued to deter aggressive capital outflows from Japan.

Overall risk appetite held firm amid increased speculation that a further fiscal support programme would be approved. Equity markets posted strong gains, although there was still an important element of caution given uncertainty over political developments. Chicago Fed President Evans continued to lobby for further fiscal stimulus and reiterated his preference for an inflation rate at 2.5% for some time. With equities making gains, USD/JPY advanced to near 105.80.

Risk appetite held firm after President Trump was released from hospital, although there were still underlying reservations over his health while there were further coronavirus cases within the White House. There were also further uncertainties over fiscal policy developments with on-going tensions between Treasury Secretary Mnuchin and House Speaker Pelosi, although talks are set to continue. USD/JPY edged lower to the 105.65 area as equity futures were little changed.

The final UK PMI services-sector index was revised higher to 56.1 from the flash reading of 55.1, although this was still a slowdown from the August reading.

In comments on Monday, Bank of England Monetary Policy Committee Member Haskel stated that near-term risks for the economy are skewed to the downside. Inflation pressures are likely to remain low, especially with a material amount of spare capacity in the economy. Haskel stated that he was ready to back further stimulus and was slightly more positive on the potential benefits of negative interest rates.

There was no significant reaction to Chancellor Sunak’s Conference speech with underlying concerns over unemployment still significant with the furlough scheme ending at the end of this month.

The overall impact of domestic economic fundamentals was limited with markets monitoring political developments and global risk appetite. There were underlying expectations that some form of deal would be agreed with the EU even if the timetable slipped while firmer equity markets underpinned the currency.

Economic Calendar

07:00German Factory Orders (M/M)(AUG)2.60%3.30%
09:30GBP PMI Construction(SEP)58.554.6
09:35European Central Bank President Lagarde Speaks--
13:30USD Trade Balance(AUG)-64.40B-63.60B
13:30CAD Trade Balance(AUG)-2.50B-2.45B
14:00European Central Bank President Lagarde Speaks--
15:00USD JOLTs Job Openings(AUG)6.685M6.618M
15:40USD FOMC Member Powell Speech--
16:30ECB Lane speech--
16:45FOMC Harker Speech--
22:30AUD AiG Performance of Service Index(SEP)-42.5
23:00FOMC Robert Kaplan 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.