Risk appetite held firm for most of Tuesday amid hopes for US fiscal stimulus.

Risk appetite held firm for most of Tuesday amid hopes for US fiscal stimulus. There was a sharp reversal after President Trump ordered a halt to coronavirus support package negotiations.

Wall Street indices declined rapidly into the New York close amid fears over the recovery outlook, although there was an element of resilience in Asia. The dollar gained fresh defensive support as equities declined and there were further Euro-zone coronavirus reservations.

EUR/USD retreated to 1.1730 after failing around 1.1800. Sterling was subjected to further volatility on conflicting trade negotiations reports with the slide in risk appetite leading to renewed losses as GBP/USD hit selling at 1.3000. Commodity currencies dipped as risk appetite deteriorated, but AUD/USD found support below 0.7100.

Currency markets were confined to narrow ranges ahead of Tuesday’s New York open with the dollar edging lower amid firm risk appetite. The Euro was hampered by fresh speculation that ECB President Lagarde would signal that the central bank would move towards further monetary easing, including the possibility that interest rates would be pushed deeper into negative territory. Bank chief economist Lane stated that the next few weeks would be critical and that a forceful fiscal response was needed. EUR/USD did test the 1.1800 area, but failed to hold a brief move above this level.

ECB President Lagarde reiterated that the bank does not target the exchange rate, but is paying close attention to exchange rate developments.

The overall US trade deficit widened to a 14-year high of $67.1bn from $63.4bn the previous month and slightly above consensus forecasts as import growth out-stripped imports. JOLTS data recorded an increase in job openings of 6.49mn for August from 6.60mn the previous month.

Fed Chair Powell reiterated that all should be done to do what we can to manage downside risks to the outlook, there is still a long way to go in the recovery and the outlook remains highly uncertain. A weak recovery could also trigger normal recessionary dynamics. In this context, he noted that too little support would lead to a weak recovery while the risks of over-doing policy support seem smaller. The Fed chief reiterated that negative interest rates were not a tool that the bank was looking to use.

There was no further extension of risk appetite following Powell’s comments which limited scope for further dollar selling even though the comments remained dovish.

The dollar gained an element of defensive support late in US trading following the latest political developments with commodity currencies also moving lower. EUR/USD retreated sharply to lows around 1.1725 before a marginal recovery on Wednesday with German industrial production missing expectations and declining 0.2% for August.

Risk appetite held steady ahead of Tuesday’s New York open while the dollar was confined to narrow ranges against the Japanese currency. Markets were waiting for further developments surrounding President Trump and US fiscal policy. Dallas Fed President Harker stated that the policy response moving forward needed to be fiscal. USD/JPY settled around 105.65 at the European close as narrow ranges prevailed.

President Trump announced late in the New York session that he had ordered a halt to negotiations on coronavirus relief until after the election and accused House Speaker Pelosi of not negotiating in good faith. Given the focus on fiscal policy, there were renewed concerns over the US recovery outlook and US coronavirus cases also increased on the day. New York equities declined sharply as risk appetite deteriorated with fresh defensive yen demand as USD/JPY tested the 105.50 area.

There was a tentative recovery in risk in Asian trading after Trump stated that he wanted immediate action on airlines support and pay check protection, although uncertainty remained intense given the volume of US political noise and on-going campaigning. USD/JPY settled around 105.75 in early Europe on Wednesday with EUR/JPY just above 124.00.

The UK PMI construction index strengthened to 56.8 for September from 54.6 previously and above consensus forecasts of 54.0. Overall confidence strengthened to a 7-month high and the rate of job losses slowed. Strength was led by the residential sector while civil engineering contracted again. Sterling edged higher following the data and there was a slight shift in money markets with a dip in expectations for negative interest rates but there was further GBP/USD selling around 1.3000.

The UK currency dipped sharply ahead of the New York open following source reports that the EU would not make concessions on trade talks ahead of the October 15th EU Summit. There was a slide to lows near 1.2920 against the dollar while the Euro strengthened to 0.9125. The UK currency rallied on reports of a more positive assessment from other EU sources with comments that the last round of talks had made good headway. The sources also indicated that talks could extend beyond the EU October 30th deadline.

Economic Calendar

08:30GBP Halifax HPI (M/M)(SEP)1.50%1.60%
12:00USD MBA Mortgage Applications--4.80%
13:10European Central Bank President Lagarde Speaks--
15:00CAD Ivey PMI(M/M)(SEP)-67.8
15:30USD Crude Oil Inventories--1.980M
18:00FOMC Member Kashkari Speaks--
19:00USD FOMC Statement--
19:00USD Fed FOMC Minutes--
19:00FOMC member John C. Williams speech--
19:00USD FOMC Statement--
20:00USD Consumer Credit(AUG)14.60B12.25B
20:00FOMC member John C. Williams 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.