Risk appetite was slightly less robust on Wednesday amid fears that euphoria surrounding vaccines was overdone.

Risk appetite was slightly less robust on Wednesday amid fears that euphoria surrounding vaccines was overdone.

Equities edged lower amid pressure for a correction, although overall the retreat was very limited amid underlying optimism. The dollar posted net losses amid the on-going flow of funds into risk assets and a lack of yield support.

EUR/USD continued to pepper resistance above 1.1900 and advanced to 12-week highs around 1.1930 on Thursday. Sterling was little changed with worrying rhetoric on trade talks and domestic reservations offsetting global recovery hopes with GBP/USD below 1.3400. Commodity currencies secured limited net gains amid the weaker US currency.

The Euro pushed sharply higher in early Europe on Wednesday with a more determined EUR/USD break above the 1.1900 level, although there was selling interest on rallies.

US initial jobless claims increased to 778,000 in the latest week from a revised 748,000 the previous week and above market expectations of 730,000. Continuing claims declined to 6.07mn from 6.37mn previously and close to consensus forecasts, but the data overall triggered fresh concerns over near-term trends in the labour market. Durable goods orders increased 1.3% for October on a headline and underlying basis while new home sales declined marginally to an annual rate of 1.00mn and well above market expectations as data in the housing sector remained very strong. Personal income declined for October while spending edged higher.

The PCE core prices index was unchanged for October, slightly below expectations of 0.1%, with the year-on-year increase at 1.4% from 1.6%. This gauge is a key inflation indicator for the Federal Reserve and will reinforce expectations that monetary policy will need to be extremely supportive in an attempt to raise the inflation rate.

The dollar overall was unable to gain any traction and EUR/USD continued to probe resistance above 1.1900 at the European close.

Federal Reserve minutes from the early November meeting tended to focus on the outlook for asset purchases. Several committee members suggested that the Fed could lower the total amount of purchases but still provide as much support if it bought longer-term bonds and the minutes maintained expectations of a loose policy.

Germany reported that the partial lockdown measures would be extended until December 20th, maintaining near-term unease over euro-zone economic trends. The dollar, however, remained under pressure on Thursday with EUR/USD at 12-week highs around 1.1935.

Risk appetite was relatively stable during Wednesday with equity markets unable to make further headway amid pressure for  correction. The dollar was unable to make significant headway and USD/JPY traded just below 104.50 at the European close as underlying US sentiment remained weak.

Market optimism over the 2021 outlook remained high, although there were some concerns over policies pursued by President Trump before the January inauguration.

Chinese sources suggested that the central bank is likely to exit some stimulus measures as the economy improves, although with no short-term increase in interest rates. Overall risk conditions held steady on Thursday despite some concerns over the potential for reduced Chinese stimulus.

US markets will be closed for the Thanksgiving holiday and liquidity will remain low on Friday which will maintain the potential for choppy trading conditions, although narrow ranges may prevail. The dollar overall remained on the defensive and USD/JPY traded around 104.35 in early Europe as the yen edged lower on the crosses.

In his spending review, Chancellor Sunak stated that the economic emergency had only just begun and there would need to be a further £55bn in coronavirus support for the next financial year. According to the Office for Budget Responsibility, UK GDP will contract 11.3% for 2020 and, despite forecasts of growth exceeding 5% in the next two years, the economy is not expected to regain pre-covid levels until the end of 2022.

The government borrowing requirement was forecast at £394bn for the current year(19% of GDP) with a decline to £164bn next year. Sterling drifted lower amid the unfavourable comparison with other major economies and unease over the medium-term fundamentals. The very high borrowing requirement will also maintain pressure for further Bank of England bond purchases.

Markets continued to monitor Brexit developments closely amid on-going political noise while EU Chief Negotiator Barnier threatened to walk out of talks if there was no shift in UK stance within the next 48 hours. EU Commission President von der Leyen also stated that there was still a lot of work to do, although added that progress had been made. There was little overall Sterling reaction as GBP/USD consolidated just below 1.3400 while GBP/EUR settled just above 1.1230.

There is the potential for sharp moves on Brexit headlines, especially with month-end positioning also significant and English coronavirus tiers will be announced on Thursday.

Economic Calendar

07:00German GfK Consumer Confidence (DEC)-5-3.2
07:30Employment Level5.095M
07:45Consumer Confidence(NOV)94
12:00ECB Lane speech
12:30ECB Monetary Policy Meeting Accounts
19:00OPEC Meeting
23:50JPY Buying Foreign Stocks422.5B
23:50JPY Buying Foreign Bonds1009.1B

*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.