Substantial UK fiscal tightening in prospect.
The Euro-Zone Sentix investor confidence index recovered to -30.9 for November from -38.3 the previous month and stronger than consensus forecasts of -35.0.
According to Sentix, the rise in situation and expectation values shows how sensitively investors react in their economic expectations to signals from the energy market. It noted that October temperatures were higher than usual and gas storage facilities in Germany are full.
China’s coronavirus policies remained an important focus with further speculation that restrictions would be eased next year which helped underpin risk appetite.
The Euro was able to take advantage of a weaker US dollar on Monday with further hopes that an adjustment in China’s coronavirus policies would help underpin the global economy. There was also fresh speculation that the Federal Reserve would slow the pace of rate hikes.
EUR/USD tested above parity before fading.
The latest reports suggested that Chancellor Hunt was aiming to tighten fiscal policy by around £54bn in the November 17th Autumn Statement. This was towards the upper end of expectations, reinforcing recession concerns and the potential for a relatively dovish Bank of England stance.
Markets will be monitoring the results of the US mid-term elections with expectations that the Republicans will regain control of the House. The Senate race is liable to be close, but with the potential for Democrats to lose the upper chamber as well which would increase concerns over a lame-duck presidency. The final Senate outcome may not be known for weeks if mail-in votes prove decisive.
Republican control of the House and Senate would increase fears over a lame-duck presidency.
A recovery in Euro-Zone economic sentiment helped underpin risk appetite on Monday. The Euro also gained net support from hopes for a stronger global economy. Speculation over a less aggressive Fed stance undermined dollar support.
EUR/USD initially failed to break above party, but moved above this level after the European close. EUR/USD peaked near 1.0040 before a retreat back to just below parity on Tuesday. The dollar index recovered from 10-day lows.
US 10-year yields were little changed on Monday which limited yen support. USD/JPY settled around 146.50 and was resilient on Tuesday as US yields edged higher with net gains to 146.80.
The Swiss franc resisted further selling as a further decline in Swiss sight deposits underpinned the Swiss currency. EUR/CHF failed to hold above 0.9900 while USD/CHF dipped below 0.9900 before recovering.
Sterling lost ground early in Europe before a recovery as risk appetite strengthened again. GBP/USD posted further strong gains to near 1.1540 before dipping back below 1.1500 to trade around 1.1470.
Commodity currencies posted net losses early in Europe, but regained ground later in the session. AUD/USD found support above 0.6400 and rallied to near 0.6480 before settling around 0.6450. USD/CAD settled above 1.3500 at around 1.3520 as a dip in oil prices limited Canadian currency support.
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