Risk conditions were less robust as unease over near-term US coronavirus developments offset longer-term vaccine hopes.

Risk conditions were less robust as unease over near-term US coronavirus developments offset longer-term vaccine hopes. Equity markets registered limited net losses given the amount of good news priced in with US-China political tensions also significant.

There was choppy dollar trading with the US currency eventually settling with slight gains cautious risk conditions limiting selling. EUR/USD hit selling interest above 1.2150 and retreated towards 1.2100.

Sterling dipped sharply amid negative Brexit trade talks rhetoric, but high-level political talks due later this week helped pare losses.

Commodity currencies pared sharp losses in very choppy trading to end little changed.

German industrial production increased 3.2% for October following an upwardly-revised 2.3% gain previously. The Euro-zone Sentix investor confidence index improved to -2.7 for December from -10.0 previously and above consensus forecasts of -8.3 which demonstrated some resilience despite renewed lockdown measures. German Chancellor Merkel warned that additional measures would be needed after Christmas and the Euro initially lost ground as Brexit fears also had a negative impact.

The US employment index strengthened to 98.8 for November from 98.3 previously. There were, however, increased fears over the short-term US outlook, especially with a fresh surge in coronavirus cases. There was further speculation that expansive US fiscal and monetary policies would undermine the dollar, especially with stronger risk appetite and a recovery in the global economy. The US currency dipped sharply in New York which helped propel EUR/USD to highs near 1.2165.

There was caution ahead of Thursday’s ECB policy decision with very strong expectations of further policy easing and markets wary over the potential for stronger rhetoric against currency gains. The US dollar also managed to regain some ground and, in this environment, EUR/USD retreated to the 1.2120 area in choppy trading conditions. The dollar was able to regain limited ground on Tuesday in tentative conditions and EUR/USD edged lower to the 1.2110 area.

China’s currency reserves increased to a 4-year high of $3.18trn for November with a monthly increase of $50bn as the global travel shutdowns continued to limit Chinese tourism-related outflows. The firm yuan continued to limit underlying dollar support and the US currency failed to hold limited gains amid wider losses.

Markets continued to monitor US fiscal stimulus talks and, although there were positive noises, there were no definitive moves within Congress.

US futures edged lower after the New York close following reports that the US faced delays in securing further supplies of the Pfizer vaccine. Limits to vaccination would delay a potential US rebound with markets also alarmed by the increases in US coronavirus cases and fresh restrictions, especially in California. Government adviser Fauci also warned over a major threat to public health surrounding the Christmas period which hampered overall risk conditions and underpinned the yen.

Japan’s Tankan monthly manufacturing index recovered to -9 from -13 previously while the non-manufacturing index remained subdued. Narrow ranges prevailed on Tuesday with USD/JPY trading just above the 104.00 level.

Halifax reported a 1.2% increase in house prices for November with the annual increase at 7.6% from 7.5% previously and the strongest rate since August 2016. There was no significant reaction as political noise continued to dominate Sterling.

Confidence in a the possibility of an EU/UK trade deal dipped sharply in early European trading amid a batch of downbeat assessments and rhetoric from officials. Markets were unsure whether this was political stage management or a true reflection of developments, but the path of least resistance was Sterling selling, especially given previous optimism over talks.

The UK did offer to withdraw controversial Internal Market Clauses if there was a Brexit deal and Sterling gradually pared losses during the day.

After another phone conversation, UK Prime Minister Johnson and EU Commission President von der Leyen agreed that the basis for a deal was not there. Johnson will, however, travel to Brussels this week to meet von-der Leyen in an attempt to broker a political deal. Rhetoric was downbeat, but markets assumed on political grounds that Johnson would have to return from Brussels with some form of agreement. Rhetoric will continue to be monitored very closely in the short term.

Barclaycard recorded a 1.9% annual decline in consumer spending for November with a surge in online grocery shopping offset by a slide in department store sales. Sterling lost ground in early Europe on Tuesday with the downbeat political tone sapping support and GBP/USD traded below 1.3350 with GBP/EUR at 1.1000.

Economic Calendar

06:30Non-Farm Payrolls QQ1.80%
06:45CHF Unemployment Rate n.s.a.(NOV)3.30%3.20%
06:45CHF Unemployment Rate s.a.(NOV)3.40%3.40%
10:00German ZEW Survey (Economic Sentiment)(M/M)(DEC)41.739
10:00German ZEW Survey (Current Situation) (DEC)-65-64.3
10:00Euro-Zone GDP (Y/Y)-15.00%-4.40%
10:00Euro-Zone GDP (Q/Q)-12.10%12.60%
10:00EUR Euro-Zone ZEW Survey (Economic Sentiment)(DEC)32.8
13:30Nonfarm Productivity (Q/Q)4.90%
23:30AUD Westpac Consumer Confidence(DEC)2.50%

*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.