The dollar retreated into the US open amid fresh optimism that there could be near-term US fiscal stimulus agreement.

The dollar retreated into the US open amid fresh optimism that there could be near-term US fiscal stimulus agreement.

There was a reversal in New York as confidence and risk appetite faded once again amid no fiscal agreement with coronavirus concerns also significant. US equities reversed course to trade significantly weaker near 10-day lows with global bourses overall losing some ground.

The dollar pared losses as risk appetite faded, although there was still a net retreat. EUR/USD failed to test 1.1800, but held net gains with support from the Chinese yuan strengthening to a 2-year high. Sterling failed to hold its best levels amid mixed trade signals and weaker risk conditions with GBP/USD selling above 1.3000. Commodity currencies also faded as equities retreated while there were further expectations of Reserve Bank of Australia easing.

ECB member Holzmann stated that there is no need for further monetary easing yet, but more action may be needed if the crisis worsens. Markets overall expected that there would be further measures by the central bank before the end of 2020. Despite expectations of a dovish ECB stance, the Euro gained ground ahead of the New York open as underlying dollar demand dipped amid expectations of further fiscal stimulus. EUR/USD strengthened to highs above 1.1780 before stalling.

The NAHB housing index strengthened to 85 for October compared with expectations of no change from September’s reading of 83. The extremely low level of interest rates has continued to underpin the housing sector despite unease over labour-market trends.

Atlanta Fed President Bostic stated that widespread and permanent job losses pose a risk to the economy. Vice-Chair Clarida stated that output would not recover to 2019 levels for at least another year and that it would take even longer than that for unemployment to fall to a level consistent with the maximum employment mandate.

The dollar overall was unable to gain significant traction, but commodity currencies lost some ground as equity markets retreated and EUR/USD was held below the 1.1800 level. As Wall Street indices moved lower, the Euro failed to gain ground, although ranges were narrow and the currency was resilient.

The Chinese yuan maintained a strong tone on Tuesday with the offshore rate strengthening to 2-year highs which was a significant factor providing underlying Euro protection. EUR/USD held close to 1.1775 with underlying coronavirus reservations limiting scope for further Euro support.

Risk appetite remained firm ahead of Monday’s US open with fresh speculation that there would be a breakthrough on a fiscal stimulus ahead of the US elections.

The dollar overall was trapped within extremely narrow ranges and USD/JPY settled around 105.40 at the European close with the yen failing to gain strong support.

After another round of talks between US Treasury Secretary Mnuchin and House Speaker Pelosi an aide to Pelosi stated that differences had narrowed and there will be further talks on Tuesday. There was, however, further evidence of resistance from Senate Republicans and an important element of scepticism that there would be a deal ahead of the election. President Trump stated that he would participate in the final election debate this week, but complained over the rules.

There were reports that the Bank of Japan will cut its outlooks for the economy and inflation at next week’s policy meeting. USD/JPY edged higher on Tuesday to trade just above 105.50 with some unwinding of long yen positions, although ranges remained narrow.

Sterling strengthened sharply during European trading on Monday with market expectations that there would be a fresh attempt to secure a trade breakthrough and salvage a trade deal with the EU. GBP/EUR also declined to lows near 1.1000 against the UK currency with a fresh GBP/USD move above 1.3000.

The firm tone in risk appetite was also a significant factor underpinning demand for Sterling, although there was further GBP/USD selling interest above 1.3000.

There were notably mixed comments from ECB Cabinet Minister Gove who reiterated that there was no basis at this point for continuing trade talks.

There was, however, a conversation between EU Chief Negotiator Barnier and UK counterpart Frost with Barnier confirming that the EU was willing to intensify talks. This suggested that talks would continue, maintaining an important element of confusion. Subsequently, Frost and the UK government reiterated that there was no basis for continuing talks at this stage, but the two sides would keep in close contact. The UK currency dipped again in choppy trading.

Markets overall tended to look through the rhetoric and assume that some form of trade deal would eventually be put in place, but confidence remained fragile with fears over the economic recovery also an important factor. GBP/USD faded to below 1.2950 as global risk appetite also deteriorated again while the Euro posted limited net gains.

Economic Calendar

07:00CHF Trade Balance(SEP)4.320B3.543B
08:00EUR German PPI (M/M)(SEP)-0.00%
08:00EUR German PPI (Y/Y)(SEP)--1.20%
13:30USD Building Permits(SEP)1.520M1.476M
13:30USD Building Permits (M/M)(SEP)--0.50%
13:30USD Housing Starts(SEP)1.477M1.416M
13:30USD Housing Starts (M/M)(SEP)--5.10%

*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.