The dollar gained an element of defensive support amid the more negative risk tone.

Risk appetite dipped again during Tuesday, especially in the New York session, with unease over global recovery trends. US equities declined sharply led by a further slide of 4% for the Nasdaq index.

Global bourses were hampered by negative coronavirus vaccine developments with rallies attracting selling interest. The dollar gained an element of defensive support amid the more negative risk tone and retreat in European currencies. The Euro was vulnerable to a net correction ahead of the ECB meeting and EUR/USD traded below 1.1800.

Sterling retreated sharply again as Brexit tensions continued to undermine sentiment and compounded the impact of negative risk appetite. Commodity currencies declined sharply as equity markets moved lower.

Euro-zone second-quarter GDP was revised to a decline of 11.8% from the previous estimate of 12.1% with a 14.7% annual decline. The Euro was unable to gain significant support during the day with further evidence of position adjustment ahead of Thursday’s ECB policy meeting. There was increased caution over holding long Euro positions given the possibility of verbal intervention to weaken the currency or a stronger signal on forward guidance from President Lagarde.

The US NFIB small-business confidence index increased slightly to 100.2 for August from 98.8 the previous month. There was an improvement in hiring plans for the month, although overall confidence in the economy was slightly weaker as coronavirus developments sapped support.

The IBD consumer confidence index declined to 45.0 for September from 46.8 previously, maintaining reservations over the outlook for spending and the economy.

The dollar gained an element of defensive support as equities moved lower. The Euro was also sapped to some extent by reservations over the Brexit trade talks situation which damaged confidence in European currencies.

Overall, the US dollar strengthened to a 4-week high and EUR/USD retreated to lows just below 1.1770 before finding some support. The pair traded around 1.1770 on Wednesday as the dollar held a firm tone in global markets.

USD/JPY was unable to make a challenge on the 106.50 area ahead of the New York open and edged lower in tandem with a retreat in US futures. Selling pressure in equities intensified at the New York open with a further slide in the Nasdaq index and the index closed 4% lower.

There were further concerns over US-China trade tensions and there was reduced speculation over an early coronavirus vaccine as nine companies pledged not to seek vaccine approval until they were shown to be safe. The slide in risk appetite triggered significant yen gains on the crosses and USD/JPY dipped below the 106.0 level.

There was fresh speculation over fiscal policy with the return of Congress following the Labor Day holiday. Senate majority leader McConnell stated that a vote on targeted relief would be held this week, but there was no evidence of wider consensus on a deal.

Risk appetite was undermined in Asia by AstraZeneca’s decision to halt the phase-3 vaccine trial due to an adverse reaction in one patient. US equity futures did recover some ground which provided some relief, but USD/JPY dipped to 105.80 as futures moved lower again. Chinese inflation data had little impact and EUR/JPY was held below 125.00.

Brexit trade considerations continued to have an important Sterling impact on Tuesday. According to Northern Ireland Secretary Lewis, the UK would break international law in a limited way with the Internal Market legislation. There were also media reports that the UK government legal department head had resigned amid opposition to proposed Withdrawal Agreement changes. The text of the Bill is due to be released on Wednesday with political reaction watched closely.

German minister Scholz commented that the latest UK signals do not raise hopes for a Brexit deal and France stated that a deal was unattainable if the UK opposes a level playing field. The formal talks resumed on Tuesday with rhetoric from all sides watched very carefully. A spokesman for Prime Minister stated that a deal was still achievable, although more realism is needed from the EU. Rhetoric will continue to be monitored closely in the short term.

There was renewed speculation over negative interest rates and UK 2-year yields declined to fresh record lows which undermined the UK currency.

The weaker tone in risk appetite was also an important negative market influence, especially as US equities moved sharply lower and Sterling volatilities hit a 12-week high. GBP/USD declined to near 1.3000 while Sterling lost ground on the major crosses.

Latest reports indicate that the government will tighten nationwide coronavirus restrictions to curb large gatherings, maintaining unease over an impact on the economic recovery.

Economic Calendar

06:45CHF Unemployment Rate n.s.a.(AUG)3.30%3.20%
06:45CHF Unemployment Rate s.a.(AUG)3.40%3.40%
12:00USD MBA Mortgage Applications--2.00%
13:15CAD Housing Starts(AUG)-245.6K
15:00CAD BoC Rate Decision0.25%0.25%
23:45NZD Electronic Card Retail Sales (Y/Y)(AUG 01)-11.40%
23:45NZD Electronic Card Retail Sales (M/M)(AUG 01)-1.10%

*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.