Sterling recovered from intra-day losses amid on-going Brexit rhetoric.

Risk appetite held firm on Thursday with hopes that US fiscal stimulus could still be delivered even with intense political uncertainty. US equity markets made further headway and China made gains as trading resumed, although Asian markets overall were unconvinced.

Currencies were held in narrow ranges on Thursday with the dollar edging lower on Friday as defensive demand remained limited.

EUR/USD was trapped in very narrow ranges before edging higher to 1.1775. Sterling recovered from intra-day losses amid on-going Brexit rhetoric as positive risk appetite provided support, but domestic data was weaker than expected. Commodity currencies secured net gains on solid risk conditions with USD/CAD at 2-week lows below 1.3200.

US initial jobless claims declined slightly to 840,000 from a revised 849,000 the previous week, but slightly above consensus forecasts of 820,000. Continuing claims declined sharply to 10.98mn for the week from 11.98mn the previous week and there was a net decline in those receiving pandemic unemployment assistance. The drop in continuing claims provided an element of reassurance over trends, but initial claims remained at very high levels.

The dollar was hampered by generally firm risk conditions which limited potential defensive demand. The Euro, however, was hampered by underlying reservations over the coronavirus outlook as cases continued to increase across many Euro-zone countries and further social restrictions were put in place.

Boston Fed President Rosengren commented that more quantitative easing is still worth weighing despite limited gains, maintaining market expectations that the central bank could sanction further stimulus. Kansas City Fed President George stated that the new inflation framework is for a tolerance of inflation above 2%. She also warned that the outlook had substantial risks. Underlying real yields remained very low which continued to undermine dollar support.

Overall, EUR/NOK settled just above the 1.1750 level. The dollar drifted lower on Friday amid a lack of defensive demand and gains for commodity currencies with EUR/USD trading around 1.1775. Position adjustment could be a significant element ahead of the weekend.

The US electoral Commission stated that the next presidential debate would be held virtually, but President Trump condemned the move and stated that he would not participate. There was a further stream of rhetoric from Trump with remarks that he would use tariffs on China in the second term. The remarks potentially undermined risk appetite, although he added that he was optimistic that there was a good chance of a fiscal stimulus deal being approved. House Speaker Pelosi stated that there would be no standalone airline bill without a bigger aid plan. US equities made further headway, but USD/JPY was held in very tight ranges around the 106.00 level.

Expectations of further fiscal stimulus helped underpin risk assets with market optimism that there would be stimulus after the November elections even if there is no move over the next few weeks. In this context, market confidence held firm, although uncertainty remained extremely high.

Chinese markets re-opened after the week-long holiday with the Caixin PMI services index strengthening to 54.8 from 54.0 previously which helped underpin risk conditions. Risk appetite held firm, although the dollar overall lost support and USD/JPY settled around 105.85 against the yen.

Bank of England Governor Bailey stated that the economic recovery had been very uneven across the country and that risks are very much to the downside. He commented that he strongly hoped that there would be a Brexit deal, but the post-transition period would not be easy. He also commented that we must use policy aggressively and actively with the bank by no means out of firepower. Markets continued to expect further stimulus before the end of 2020.

Rhetoric surrounding Brexit trade talks continued with further reported comments from EU Chief Negotiator Barnier that a deal was unlikely by the October 15-16th Summit while EU Council President Michel called for greater UK clarity. There were also reports that Barnier had been instructed to keep a hard-line position on fishing.

Sterling was hampered by on-going concerns over increased coronavirus cases, although there were also reports that Chancellor Sunak could introduce a local furlough scheme. GDP increased 2.1% for August compared with expectations of 4.6% to give a 9.3% annual decline and industrial data was also weaker than expected with a 6.4% annual decline. The data maintained reservations over the underlying recovery outlook and GBP/USD was held near 1.2950.

Economic Calendar

07:00GBP Industrial Production (M/M)(AUG)2.50%5.20%
07:00GBP Industrial Production (Y/Y)(AUG)-4.60%-7.40%
07:00GBP Manufacturing Production (M/M)(AUG)3.00%6.90%
07:00GBP Manufacturing Production (Y/Y)(AUG)-5.90%-10.10%
07:00GBP Trade Balance(AUG)-9.00B-8.64B
07:00GBP Trade Balance Non EU(AUG)-2.80B-2.36B
07:45Industrial Output MM(AUG)2.00%3.80%
09:00Industrial Output YY WDA(AUG)-9.70%-8.00%
09:00Industrial Output MM SA(AUG)1.20%7.40%

*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.