Risk appetite was slightly more cautious in New York on Monday, but confidence was boosted again after the New York close as US transition was officially sanctioned.

Risk appetite was slightly more cautious in New York on Monday, but confidence was boosted again after the New York close as US transition was officially sanctioned. Wall Street equities posted net gains and futures moved higher on Tuesday with global bourses overall close to record highs amid vaccine optimism.

Dollar volatility increased with a sharp recovery as a rebound from technical support gathered pace, but the US currency lost ground again on Tuesday. EUR/USD was again unable to hold a brief move above 1.1900 and dipped sharply to 1.1800 lows before settling around 1.1850. Sterling posted net gains amid vaccine and trade talks optimism but retreated from its best levels with a GBP/USD slide from 11-week highs near 1.3400.

Commodity currencies retreated sharply from peak levels on Monday before gaining renewed ground on Tuesday as risk appetite strengthened.

According to flash data for November, the German manufacturing PMI index declined slightly to 57.9 from 58.2 previously and above consensus forecasts of 56.5. The services sector data declined to 46.2 from 49.5 and close to market expectations. The Euro-zone manufacturing index declined slightly to 53.6 from 54.8 previously while the services-sector PMI declined to 41.3 from 46.9 and the lowest reading for 6 months. The data overall provided limited relief given that the services data was not as bad as expected. EUR/USD strengthened to highs just above 1.1900, but again failed to break above this level which triggered a correction.

The US PMI manufacturing index strengthened to 56.7 for November from 53.4 the previous month and well above consensus forecasts of 53.0. The services-sector index also posted a gain to 57.7 from 56.9 and above market expectations of 55.0. The data offered important reassurance over the near-term US outlook which helped underpin the US currency, especially with reduced expectations of further near-term Federal Reserve easing.

The US currency index also rebounded strongly from a key support area which provided an important boost to the dollar against major currencies. The Euro was also hampered by a slide in precious metals and EUR/USD weakened sharply to lows at 1.1800 before a fresh rally as defensive dollar demand remained lower.

ECB council member Rehn stated that the bank must keep current financing conditions for as long as needed with the bond purchases and cheap loans the key instruments. The comments continued to dampen expectations that the central bank would move to cut interest rates. The dollar edged lower against European currencies and there were fresh gains for commodity currencies with EUR/USD around 1.1850 as overall risk appetite also held strong.

Markets continued to fret over near-term policies pursued by the White House with reports that the US wanting to pursue a tougher stance on China, although the market impact was limited given the forthcoming change in Administration. Equities remained in positive territory and the US dollar was able to benefit from wider gains with USD/JPY advancing to near 104.50 following the stronger than expected US data as US yields moved higher.

There was further speculation that former Fed Chair Yellen would be appointed as Treasury Secretary under the Biden administration which triggered expectations of a strong fiscal policy response next year and close co-ordination with the Fed.

After the New York close the General Services Administration stated that it was officially ready to commence the transition process. Although President Trump refused to concede, he did accept that that the US needed to move on and the news also provided a limited boost to risk appetite. Defensive demand for the yen was weaker with USD/JPY just below 104.50 in early Europe as equities held firm.

According to flash PMI data, the UK PMI manufacturing index strengthened to 55.2 from 53.3 the previous month, although the data was boosted by a renewed bout of stock building before the end of the transition period. The services sector declined to 45.8 from 52.3 previously, but also above expectations. Unemployment continued to decline sharply, although overall business confidence strengthened to the highest level for over five years amid optimism over vaccine developments.

Bank of England chief economist Haldane noted optimism over a recovery in the economy for 2021, although he also warned that there would be permanent scarring for the economy and also noted that November data had registered a downturn. Vaccine hopes will limit the potential for further policy easing.

There were continued expectations that there would be a UK/EU Brexit trade deal within the next few days, although with no sign of an imminent breakthrough in talks.

GBP/USD strengthened to 11-week highs just below 1.3400, but then declined sharply to below 1.3300 as the US dollar rebounded aggressively. GBP/EUR rallied to 1.1275. Sterling held steady on Tuesday with gains in commodity currencies providing net support and there was also some relief that more businesses will be allowed to re-open once the England lockdown eases. Brexit developments will continue to be watched very closely with GBP/USD around 1.3340 in early Europe.

Economic Calendar

07:00Germany GDP (Q/Q)8.20%-9.70%
07:00Germany GDP (Y/Y)-4.10%-11.30%
07:45Consumer Confidence(NOV)94
09:00German Business Expectations(NOV)96.595
09:00IFO - German Current Assessment(NOV)89.890.3
09:00German IFO Business Climate Index(NOV)92.7
11:00CBI Distributive Trades Survey(NOV)-23
11:30Bank of England (BoE) Monetary Policy Committee (MPC) Member Jonathan Haskel Speaks
12:05BoJ Governor Kuroda Speaks
14:00US House Price Index (M/M)(SEP)1.50%
14:00European Central Bank President Lagarde Speaks
15:00USD CB Consumer Confidence(NOV)########100.9
16:00FOMC Member J. Bullard Speaks
17:00FOMC member John C. Williams speech
17:45FOMC Member Richard Harris Clarida Speech
17:45Gov Council Member Wilkins Speaks
17:45ECB Lane speech

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