Risk appetite held firm on Tuesday amid further expectations of US fiscal stimulus.

Risk appetite held firm on Tuesday amid further expectations of US fiscal stimulus. Reports of some progress in talks maintained the positive risk tone on Wednesday.

The dollar lost ground amid an underlying lack of defensive demand as risk appetite strengthened. The Chinese yuan strengthened to 27-month highs against the dollar.

EUR/USD moved above the 1.1800 level to 1-month highs around 1.1850 as the firm yuan provided support. Sterling was undermined by dovish BoE comments and a lack of trade headway with GBP/USD just below 1.3000 amid dollar losses. The Canadian dollar posted net gains to 5-week highs and the Australian dollar reversed losses amid a positive risk tone.

The Euro gained an element of support on Tuesday from the firm tone in global equity markets. There were still underlying concerns surrounding the coronavirus situation as the number of cases in Europe continued to increase and further restrictions were imposed. There was also no positive in Brexit talks which maintained concerns over the Euro-zone economy.  In this context, the Euro overall performance was particularly impressive as it posted significant gains into the New York open with a EUR/USD move above the 1.1800 level and strong gains on the crosses.

US housing starts increased to 1.42mn for September from 1.39mn previously, but slightly below consensus forecasts. In contrast, building permits strengthened to an annual rate of 1.55mn from 1.48mn and above market expectations of 1.52mn. The Philadelphia Fed non-manufacturing index strengthened to 25.3 for October from 20.4 previously and new orders remained in expansion territory, although there was a slowdown from September while the number of employees continued to increase. Data releases continued to have little overall market impact with market attention focussed elsewhere.

The dollar was on the defensive amid longer-term reservations over the US fundamentals with EUR/USD around 1.1825 at the European close. Expectations of further US fiscal stimulus continued to underpin risk appetite on Wednesday which undermined demand for the dollar as the US currency index declined to 1-month lows. The Chinese yuan also strengthened to 27-month highs which underpinned the Euro and the single currency made further net gains with EUR/USD gains to 1.1850.

Risk appetite remained firm on Tuesday and the Japanese yen lost significant ground as markets maintained optimism over a potential fiscal stimulus package. The dollar advanced to the 105.70 area early in US trading, but then gradually lost ground amid the wider retreat with a USD/JPY dip to below 105.50.

There were further meetings between Treasury Secretary Mnuchin and House Speaker Pelosi on a potential fiscal stimulus. A spokesman for Pelosi stated that the two sides had moved closer and will meet again on Wednesday. The rhetoric continued to underpin market sentiment as US equity futures posted further gains.

Bank of Japan board member Sakurai state that the central bank must take swift and appropriate action as needed if the economy’s recovery is delayed due to a pandemic. Asian equity markets were mixed as Chinese bourses lost ground and the yen was able to demonstrate some resilience with USD/JPY retreating to 105.30 despite an increase in US bond yields to 4-month highs which should provide an element of US currency support.

Bank of England MPC member Vlieghe stated that his own point of view was that the risks of negative rates being counter-productive were low. He considered that the downside economic risks appear to be materialising and that the outlook for monetary policy is skewed towards adding more stimulus. The remarks triggered fresh that the bank could opt for negative rates and with strong expectations of further measures at the November meeting with a potential increase in bond purchases.

The European Commission stated that it is willing to intensify trade talks with the UK and there were some unconfirmed reports that EU Chief Negotiator Barnier would come to London on Thursday. The UK government, however, repeated its position from Monday that there was no justification for re-starting talks at this stage and that the EU needed to make concessions before negotiations could resume.

GBP/USD secured a limited net advance, but stalled below the 1.3000 level and the currency overall was on the defensive with GBP/EUR weakened to 2-week lows near 1.0935. The robust risk tone helped underpin Sterling on Wednesday as politics dominated. GBP/EUR slipped towards 1.0935 and political rhetoric will continue to be watched very closely in the short term.

The CPI inflation rate increased to 0.5% from 0.2% and in line with consensus forecasts with the core rate at 1.3% from 0.9% while the September budget deficit increased to £36.1bn from £7.7bn last year. There was little impact with GBP/USD near 1.3000 against a fragile dollar.

Economic Calendar

07:00GBP Core CPI (Y/Y)(SEP)1.30%0.90%
07:00GBP CPI (M/M)(SEP)0.50%-0.40%
07:00GBP CPI (Y/Y)(SEP)0.50%0.20%
07:00GBP PPI Core Output (Y/Y)(SEP)0.10.1
07:00GBP PPI Output (Y/Y)(SEP)-0.90%-0.90%
07:00GBP PPI Input (Y/Y)(SEP)-5.50%-5.80%
07:00GBP PPI Input (M/M)(SEP)-0.40%-0.40%
07:00GBP Public Sector Net Borrowing(SEP)32.40B35.20B
08:30European Central Bank President Lagarde Speaks--
08:45ECB Lane speech--
11:00ECB Luis De Guindos Speaks--
12:00USD MBA Mortgage Applications--0.70%
13:30Bank of Canada Core CPI (Y/Y)(SEP)-0.80%
13:30Bank of Canada Core CPI (M/M)(SEP)--0.10%
13:30CAD CPI (M/M)(SEP)--0.10%
13:30CAD CPI (M/M)(SEP)-0.10%
13:30CAD New Housing Price Index (M/M)(SEP)-0.50%
13:30CAD Retail Sales Ex Autos (M/M)(AUG)0.50%-0.40%
13:30CAD Retail Sales (M/M)(AUG)1.00%0.60%
13:30CAD Wholesale Sales (M/M)(SEP)-4.30%

*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.