Despite near-term turbulence, risk appetite held firm on Friday amid expectations of eventual US fiscal stimulus.

Despite near-term turbulence, risk appetite held firm on Friday amid expectations of eventual US fiscal stimulus if Democrats win a clean sweep in November.

Wall Street posted significant gains while Chinese equities made strong gains on Monday. There was a notable dollar move during Friday as it weakened sharply on expectations of global reflationary policies.

EUR/USD traded above 1.1800 to trade near 3-week highs, but stalled on Monday. Commodity currencies posted sharp gains with strong jobs data also underpinning the Canadian dollar, although with no further headway on Monday. Sterling made net gains on hopes for a UK/EU trade-talks progress with GBP/USD at 1-month highs above 1.3000 on the weaker US dollar.

There was a sharp erosion of dollar support during Friday as defensive demand for the currency faded. There were also expectations that aggressive long-term stimulus plans would undermine the US currency on fundamental grounds. In this context, the dollar lost ground despite further concerns over coronavirus developments within the Euro-zone. Commodity currencies secured strong gains while the Chinese yuan also secured further gains. EUR/USD secured strong buying with a further push higher after breaking above the 1.1800 level with a peak near 1.1830 as the dollar declined to 3-week lows.

CFTC data recorded a decline in long Euro positions to 174,000 contracts in the latest week from 188,000 previously and the lowest reading for over two months. The data will lessen to some extent the risk of a squeeze on long Euro positions and dollar shorts, although Euro longs are still at elevated levels.

France recorded a fresh increase in coronavirus cases to a record high on Saturday which maintained concerns over the outlook. ECB chief economist Lane stated that the coronavirus surge in coronavirus cases puts a question mark over the economic rebound, reinforcing expectations of further monetary policy easing late this year.

Activity will be stifled by a partial US holiday on Monday, although Wall Street equity markets will be open with political developments remaining in focus.

The dollar secured only limited respite on Monday with EUR/USD trading close to 3-week highs around 1.1820 despite a weaker yuan.

Equity markets strengthened on Friday with increased speculation that the US would pass a fiscal stimulus package. There was further contradictory rhetoric from President Trump as he switched to wanting a more aggressive package, but reports indicated that a substantial stimulus would not pass in the Senate.

Even if near-term moves failed to materialise, there were expectations that a Biden and Democrat November victory would lead to a substantial stimulus by early 2021.

Gains in equities undermined potential support for the Japanese currency, although USD/JPY still registered net losses to the 105.60 area amid wider a wider retreat.

There was a further steepening of the yield curve with the gap between 5 and 30-year yields at a four-year high amid expectations of longer-term fiscal stimulus. There was further opposition to further substantial fiscal stimulus from Senate Republicans and no agreement between Treasury Secretary Mnuchin and House speaker Pelosi.

Markets were still expecting that a Biden victory would lead to substantial stimulus measures which underpinned risk appetite. The Chinese central bank resisted yuan gains, but the dollar came under renewed selling pressure and USD/JPY traded around 105.50.

Sterling was unable to make headway in early Europe on Friday as the latest batch of economic data triggered further reservations over the economic recovery, especially with further social restrictions coming into effect in Scotland and further measures expected in England.

The NIESR estimated that GP increased 15.2% in the three months to September compared with the official August figure of 8.0%. In monthly terms, however, the economy was not forecast to have increased for the month. The NIESR also estimated that GDP growth in the fourth quarter of 2020 would be around 1.3%.

Chancellor Sunak introduced further support for businesses forced to close, but underlying concerns surrounding the economy persisted. Sterling, however, was resilient with important support from the strong tone in global risk appetite. Overall, GBP/USD pushed above 1.3000 which boosted short-term buying interest and the Euro retreated to 0.9065. CFTC data recorded a slight decline in short positions, although there was little overall change.

Prime Minister Johnson spoke with German Chancellor Merkel and French President Macron over the weekend and called for rapid progress to narrow trade differences. There were also reports that the EU would insist on tough enforcement rules in any trade agreement. Sterling was resilient and GBP/USD traded at 1-month highs near 1.3050 on Monday with GBP/EUR around 1.1030 with political rhetoric remaining under very close scrutiny.

Economic Calendar

09:00BOE MPC Member David Ramsden Speech--
12:00European Central Bank President Lagarde Speaks--
15:00Bank of England (BoE) Monetary Policy Committee (MPC) Member Jonathan Haskel Speaks--
16:00ECB Luis De Guindos Speaks--
22:45NZD Electronic Card Retail Sales (M/M)(SEP 01)--7.90%
22:45NZD Electronic Card Retail Sales (Y/Y)(SEP 01)--0.80%

*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.