Risk appetite was notably firmer on Monday despite underlying reservations over global coronavirus developments.

Risk appetite was notably firmer on Monday despite underlying reservations over global coronavirus developments.

The dollar registered net losses as defensive demand declined, although selling pressure was limited amid caution given the extent of short positions. EUR/USD settled above 1.1650 with underlying position adjustment limiting buying interest.

Sterling posted strong gains as BoE Ramsden ruled out a near-term move to negative rates, but faded with EU/UK trade developments monitored closely. Commodity currencies made limited net gains as equities gained.

The Euro edged higher ahead of Monday’s New York open with the dollar drifting lower as the robust tone in risk appetite curbed potential US currency demand, but EUR/USD was held below 1.1700.

ECB President Lagarde reiterated that the central bank would carefully assess all incoming information, including developments in the exchange rate, with regards to its implications for the medium-term inflation outlook. There were additional comments that it was clear that the Euro’s external value had an impact on inflation. She also noted that the bank was ready to adjust all instruments as appropriate with markets still pricing in a small cut in interest rates over the next few months. There were, however, further reports of a rift within the ECB with the more hawkish members wanting to slow the pace of bond purchases and rhetoric will be watched closely.

The Dallas Fed manufacturing index strengthened to 13.6 for September from 8.0 previously and above expectations of 9.5.

There was still significant unease over the extent of short dollar positions in the market and the threat of a short squeeze which limited US selling. The Euro retreated in early US trading, but there was support towards the European close as gains in equities fuelled further US dollar weakness. The US currency edged lower on Tuesday with EUR/USD trading around 1.1670. The comments from Fed officials will be monitored during the day with month-end position adjustment also a significant element amid caution over heavy dollar selling.

Risk appetite maintained a robust tone on Monday with sharp gains in US equities which limited potential defensive Japanese yen support. The dollar was unable to make headway amid wider losses, but USD/JPY settled around 105.50 with the yen edging lower on the major crosses.

Fiscal policy will remain a significant background focus with House Speaker Pelosi again meeting Treasury Secretary Mnuchin. Pelosi outlined a revised $2.2trn stimulus proposal, but there was no evidence of support from the Republican-controlled Senate which would be needed for support measures to be approved.

The Bank of Japan stated that the pace of recovery was only moderate and the bank must be vigilant. There was an element of caution ahead of the first Presidential TV debate between Trump and Biden with the analysis of the debate and market reaction providing potentially important markers for the November vote.

Risk appetite held firm on Tuesday with USD/JPY holding just above the 105.50 level while EUR/JPY traded just above the 123.0 level.

Bank of England Deputy Governor Ramsden stated that it was essential to look at implementation issues surrounding negative interest rates if they were part of the bank’s toolbox, but he reiterated that there would be no immediate move to implement negative rates. He also pointed to structural issues in the UK financial sector which would tend to make negative rates less attractive. The comments overall dampened expectations of a move to cut rates into negative territory.

Cabinet Minister Gove took an optimistic slant on the UK-EU joint Committee meeting, emphasising that the UK wanted to implement the Withdrawal Act in full and that controversial clauses in the Internal Market Bill were a safety net. Trade Minister Truss stated that US-UK trade talks were making significant progress.

Sterling pushed sharply higher after Ramsden’s comments with a GBP/USD peak above 1.2920 while GBP/EUR rallied to 3-week highs near 1.1075 as risk appetite also strengthened on the day with strong gains for equities. The EU was still critical of the UK stance, especially on the Internal Market Bill. Although equities made further headway, Sterling retreated in New York trading. Early in Asian trading, there were reports that the EU had agreed to start writing a joint legal text which would be an important step forward and the negotiations due to start today will be extended.

UK and US political developments, together with trends in risk appetite, will continue to be watched very closely in the short term.

Economic Calendar

07:45Consumer Confidence(SEP)-94
09:30GBP Consumer Credit(AUG)0.678B1.200B
09:30GBP Mortgage Approvals(AUG)54.84K66.30K
10:00Euro-Zone Consumer Confidence(SEP)--
10:00EUR Euro-Zone ZEW Survey (Economic Sentiment)(OCT)-64
13:00Germany CPI (M/M)(SEP)--0.10%
13:00Germany CPI (Y/Y)(SEP)-0.00%
13:00Germany Harmonised CPI (Y/Y)(SEP)--0.10%
13:00Germany Harmonised CPI (M/M)(SEP)--0.20%
13:30USD Goods Trade Balance(AUG)--80.11B
13:30USD Wholesale Inventories-0.30%-0.10%
13:30CAD RMPI (M/M)(AUG)-3.00%
14:15FOMC member John C. Williams speech--
14:30FOMC Harker Speech--
15:00USD CB Consumer Confidence(SEP)9084.8
16:40FOMC Member Richard Harris Clarida Speech--
18:00FOMC Governor Keith Randal Quarles Speech--
18:00FOMC member John C. Williams speech--
22:45NZD Building Permits (M/M)(AUG)--4.50%

*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.