Risk appetite held firm on Monday, although caution prevailed ahead of the US elections.

Risk appetite held firm on Monday, although caution prevailed ahead of the US elections. Opinion polls suggested that Democrat candidate Biden remained ahead, but the lead had narrowed over the last week.

Wall Street equities posted gains with a recovery also seen in European bourses after sharp losses last week. The dollar held firm at 1-month highs as coronavirus fears undermined European currency support.

EUR/USD settled near 4-week lows below 1.1650 before a slight recovery. Sterling was marginally lower as trade hopes were offset by underlying economic concerns. The Australian dollar was resilient as the Reserve Bank cut in interest rates to 0.1% met expectations. The Canadian dollar made significant net gains amid gains in equites and oil prices.

The Euro-zone manufacturing PMI index was revised higher to 54.8 for the final October reading from 54.4 in the flash reading with the Spanish and Italian indices also beating consensus forecasts on the month. The data provided only limited relief given difficulties within the services sector.

There were further important concerns surrounding Euro-zone coronavirus developments with Italy announcing that it would introduce a 3-tier system in an attempt to curb the increase in cases.

The Euro overall remained on the defensive amid unease over the recovery outlook and expectations of further ECB easing. Although equities strengthened on the day, and the Chinese yuan held firm, the single currency was unable to make headway with EUR/USD peaking just above 1.1650.

The US ISM manufacturing index strengthened to 59.3 for October from 55.4 previously and above consensus forecasts of 55.8. There was a notably strong reading for new orders with production growth also firmer on the month while employment moved back into positive territory.

Markets are not expecting significant policy moves at Wednesday’s Federal Reserve policy meeting, although any rhetoric surrounding yields will be watched closely.

The dollar overall posted 1-month highs on the day and expected volatilities increased to the highest level since April and the Euro drifted weaker.

There will inevitably be caution on Tuesday with markets waiting for the US election results. The US currency overall held a firm tone in early Europe with a reluctance to engage in aggressive positions, although the EUR/USD edged above 4-week lows and traded just above 1.1650 at the European open.

There were underlying concerns surrounding tensions during election night and a contested result with reports that President Trump would declare victory if he was ahead on Tuesday night UK time even if there were expectations that the counting of postal votes would favour the Democrats.

National opinion polls suggested a slight narrowing of Biden’s lead, although there was still a comfortable lead. State polls indicated enough support for a Biden victory, although there was evidence that there had been a tightening in the last few days and many leads were within the margin of error.

US equities made solid gains during the day and US yields also moved higher with USD/JPY making limited net gains, although it was held below the 105.00 level. Markets continued to fret over the risk of delayed election results and prolonged uncertainty, especially given disputes over postal voting. There is also liable to be a delay in knowing the Senate outcome.

The dollar edged lower on Tuesday as US equities held firm with USD/JPY around 104.70. There will inevitably be a high degree of volatility during the Asian session on Wednesday with the yuan likely to weaken sharply if Biden loses with defensive yen support if equities slide.

The UK PMI manufacturing index was revised higher to 53.7 from 53.3 recorded in the flash reading, but the economic data had little overall impact, especially with a focus on coronavirus developments. There were increased expectations that the economy would contract for the fourth quarter.

In the House of Commons, UK Prime Minister defended the new lockdown for England and also announced that economic support for the self-employed would be doubled at a cost of £4.5bn. There was significant opposition within the Conservative Party, although the lockdown will be approved.

Overall confidence in Sterling remained weak, especially with increased expectations of GDP contraction for the fourth quarter. The lockdown measures and increased financial support will also put further upward pressure on the budget deficit. The potential for Sterling selling was limited by hopes that negotiators would be able to secure a Brexit trade deal within the first half of November. An official update is expected within the next two days.

GBP/USD dipped to 3-week lows near 1.2850 before moving back above 1.2900 while GBP/EUR settled around 1.1100 after hitting resistance close to 1.1130. Sterling edged higher on Wednesday with markets monitoring political developments and overall volatility is liable to be high.

Economic Calendar