Sterling posted net gains as Brexit uncertainty remained a key focus with sellers stepping back for now.

Equity markets on Monday were hampered by pressure for profit taking after very strong gains for the month.

There were renewed gains in US futures and Asian bourses on Tuesday amid firm Chinese manufacturing data. The dollar initially remained under pressure and dipped to 3-month lows before a sharp recovery on position adjustment. The dollar overall retreated again on Tuesday amid firm risk conditions.

EUR/USD was rejected at the 1.2000 level and retreated sharply before securing fresh buying interest to settle slightly higher above 1.1950. Sterling posted net gains as Brexit uncertainty remained a key focus with sellers stepping back for now given a potential deal. Commodity currencies dipped sharply amid the US dollar recovery, before posting a net advance on Tuesday.

German consumer prices declined 0.8% for November with the year-on-year rate declining to -0.3% from -0.2% and below consensus forecasts of -0.1%. The data maintained expectations of further ECB stimulus measures at December’s policy meeting with the Euro-zone data due for release on Tuesday.

The Chicago PMI index declined to a 5-month low of 58.2 for November from 61.1 and slightly below consensus forecasts of 59.0. Although output continued to increase, there was a small decline in new orders for the month. Pending home sales declined 1.1% for October following a 2.0% decline the previous month.

The dollar remained under pressure during the European session and EUR/USD hit the 1.2000 level just after the Wall Street open, but there was strong selling interest at this level. There had been expectations that the dollar would weaken into the London fix, but the US currency actually gained ground which was instrumental in triggering a more substantial correction and a US recovery. Commodity currencies also reversed gains and EUR/USD retreated to below 1.1950 after the London fix.

There was a further retreat to 1.1920 at the New York close and CFTC data recorded a small increase in long Euro positions in the latest week which maintains the potential for short covering. The US dollar, however, lost ground again on Tuesday, especially with some speculation that the Federal Reserve would take further action at the December meeting. EUR/USD strengthened to the 1.1960 area, although there were still reservations over pushing the pair sharply higher.

The Federal Reserve announced that the emergency liquidity programme would be extended until the end of the first quarter of 2021. President-elect Biden’s team confirmed that former Fed Chair Yellen will be nominated as Treasury Secretary. Markets expected that the administration would push for further economic stimulus once it takes office in late January.

US equities moved lower amid a correction, although the Japanese currency was unable to secure further support during the day and USD/JPY recovered to around 104.35 at the European close. CFTC data recorded a renewed increase in long yen contracts for the latest week.

China’s Caixin PMI manufacturing index strengthened to 54.9 for November from 53.6 previously and above consensus forecasts of 53.5. Output and new orders increased at the fastest pace for 10 years and employment increased at the fastest pace since 2011. The data helped underpin risk appetite with US futures posting strong gains. The yen lost ground on the main crosses with USD/JPY edging higher to the 104.35 area in tentative conditions.

UK mortgage approvals increased to 97,500 for October from a revised 92,100 the previous month which was again well above expectations and the strongest reading for 13 years. Consumer credit, however, contracted by £590mn for the month, the second successive decline while household savings increased £12.3bn. On an annual basis, lending declined 5.6%, the sharpest decline on record.

Bank of England MPC member Tenreyro saw some easing of economic uncertainty due to vaccine developments, but households may delay spending and overall developments would be assessed in the next set of central bank forecasts.

Irish foreign Minister Coveney stated that he thought a trade deal was achievable this week, although there needed to be give and take on both sides with further tensions over fishing. There were no comments from EU Chief Negotiator Barnier and it was confirmed that talks will continue over the next few days.

Markets overall were still confident that some form of deal would be reached, but there was much less confidence in the wider UK economic outlook and whether the currency would be in a position to gain sustained support, especially as there will still be economic disruption even with a trade deal in place.

GBP/USD was unable to test 1.3400 and retreated to below 1.3350 amid the wider dollar recovery while GBP/EUR rallied to near 1.1190. CFTC data recorded a small decline in Sterling shorts for the latest week and the UK currency gained some territory on Tuesday with firm risk appetite also providing net support. GBP/USD advanced to around 1.3380 with the Euro retreating to 0.8935.

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