Sterling was subjected to volatile trading and failed to hold gains triggered by BoE Governor Bailey’s downplaying of negative rates.

Risk appetite stabilised on Tuesday, although underlying sentiment remained fragile. Wall Street equities posted tentative net gains amid some hopes for fiscal stimulus.

The dollar gained net support amid fresh defensive demand with reservations over the European outlook also underpinning confidence. EUR/USD dipped to 8-week lows below the 1.1700 level amid unease over the Euro-zone recovery.

Sterling was subjected to volatile trading and failed to hold gains triggered by BoE Governor Bailey’s downplaying of negative rates with very weak sentiment. Commodity currencies overall moved lower as US dollar gains dominated with RBA rate-cut speculation hurting the Australian dollar.

The Euro drifted weaker into the New York open as the dollar maintained a firm underlying tone with speculation over further ECB easing also hampering sentiment.

Euro-zone consumer confidence recovered slightly to -13.9 for September from -14.7 previously and slightly above consensus forecasts.

US existing home sales increased to an annual rate of 6.00mn from 5.86mn previously and in line with consensus forecasts. The Richmond Fed manufacturing index strengthened to 21 for September from 18 previously with a stronger rate of growth in new and unfilled orders. The number of employees increased and there were further skills shortages. The Philadelphia Fed non-manufacturing index strengthened to 8.0 from 1.6 previously, although there was a slowdown in new orders growth.

The EU Summit scheduled for September 25-26th has been delayed by a week after EU Council leader Michel tested positive for coronavirus.

There were more hawkish than expected comments from Chicago Fed President Evans who stated that he did not see open-ended quantitative easing as providing an important part of the answer. He also suggested that rates could be increased before the inflation target is reached, although he also called for further fiscal stimulus measures. The comments from Evans pushed the dollar to a fresh 6-week high and EUR/USD dipped to lows just below the 1.1700 level.

The dollar maintained a firm tone on Wednesday with the Euro retreating to 8-week lows 1.1675 as European coronavirus fears undermined support ahead of the latest PMI business confidence data. Given the increase in coronavirus cases, the Euro will be vulnerable to fresh selling if the data casts fresh doubt on the recovery prospects.

The 3-month dollar Libor rate declined to a record low on Thursday amid a flood of Fed liquidity which undermined potential dollar support.

US equities recovered ground during US trading which curbed potential defensive yen demand. The dollar also posted gains amid the wider advance, especially after comments from Fed’s Evans, with a USD/JPY test of the 105.00 area. There were no major new elements in Fed Chair Powell’s testimony to Congress.

There were reports that the US FDA would tighten standards for emergency vaccine authorisation which would make pre-election approval less likely and markets will be wary of political interference in the process. There has been a congressional deal to reach a stop-gap funding deal to keep the Federal government open.

Japan’s September PMI manufacturing index edged higher to 47.3 from 47.2 previously with the services index at 45.6 from 45.0. Asian equity markets were mixed and USD/JPY traded just above 105.00 with no warnings over the yen’s value from Finance Ministry officials as Japan returned from a two-day holiday.

In comments on Tuesday, Bank of England Governor Bailey stated that the third-quarter economic recovery had been slightly stronger than expected in August, but there was still a high degree of uncertainty and downside risks prevailed. He reiterated that the bank would use all its tools to provide as much support to the economy as possible and that it would be flexible in returning inflation to target. He stated that negative interest rates should be part of the toolbox, although last week’s statement did not imply that the bank would use negative rates. After declining sharply in early Europe, there was a strong rally following Bailey’s comments with GBP/USD above 1.2850.

The CBI industrial orders index deteriorated to -48 for September from -44 previously and weaker than consensus forecasts of -36 with underlying confidence within industry notably fragile.

There were some slightly more positive comments from EU sources on Brexit talks, but uncertainty remained extremely high amid logistics reservations.

The introduction of further coronavirus restrictions also undermined Sterling sentiment, especially given damage to the services sector of the economy. There were reports that Chancellor Sunak would introduce wage support policies. The number of new coronavirus cases also increased to near 5,000, the highest figure since early May.

Sterling remained on the defensive with a GBP/USD dip to 2-month lows below 1.2700 after Foreign Secretary Raab warned over a potential second lockdown while GBP/EUR was around 1.0880 despite wider single-currency vulnerability.

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