Overall risk appetite held firm with expectations of strong 2021 demand conditions.

Global equities were unable to make further headway on Thursday amid pressure for a correction and valuation reservations. Overall risk appetite held firm with expectations of strong 2021 demand conditions.

The dollar remained under pressure with expectations of weaker US currency demand on a global recovery and the dollar index posted fresh 31-month lows. EUR/USD posted 31-month highs above 1.2150 with only a marginal correction. Sterling initially gained ground on Brexit trade deal hopes, although dollar weakness was crucial to hitting 2020 highs at 1.3500 before fresh Brexit reservations triggered a correction.

Commodity currencies continued to gain from US dollar weakness with AUD/USD hitting 28-month highs before a slight correction.

The final Euro-zone PMI services reading was revised higher to 41.7 from the flash reading of 41.3. Euro-zone retail sales increased 4.3% in the year to October, but markets expect a weak November figure. The Euro continued to post gains into the New York open with a decisive move above 1.2100 against the dollar.

US initial jobless claims declined to 712,000 in the latest week from 787,000 the previous week and well below consensus forecasts of 775,000. Continuing claims also declined to 5.52mn from 6.09mn previously, although the overall total including pandemic assistance was still over 20 million compared with 1.6mn in the same week last year.  Challenger reported that US layoffs declined to 64,800 in November from 80,700 the previous month, although this was still an annual increase of 65%. The labour market data overall provided an element of reassurance over trends.

The ISM non-manufacturing index declined to 55.9 for November from 56.6 previously and fractionally below expectations of 56.0. There was also a slowdown in the rate of growth in new orders and business activity for the month. Prices increased at a faster pace for the month while there was a small increase in employment.

The dollar overall continued to lose ground as commodity currencies posted significant gains with the Australian dollar at 28-month highs and EUR/USD advanced to fresh 31-month peak around 1.2175. Markets will be wary over verbal intervention by the ECB, although this will be complicated by the council meeting next week.

The dollar was unable to secure a significant recovery and remained close to 31-month lows with EUR/USD just above 1.2150 in early Europe ahead of US jobs data later in the day.

USD/JPY

US bond yields edged lower on Thursday despite solid economic data releases while equity futures secured a limited net advance which limited support for the US currency. Wider dollar selling pressure dominated during the day with USD/JPY sliding to lows below 103.70 towards the European close.

There was fresh uncertainty over the outlook for a US fiscal deal amid bickering within the US Congress.

Equities briefly dipped on reports that Pfizer would cut coronavirus shipments this year, but there was a quick recovery and there were expectations that US regulatory approval would be authorised next week. Vaccine hopes helped offset the impact of concerns over a surge in coronavirus cases and deaths in the latest data.

Asian equity markets struggled to make headway on Friday, although US futures nudged higher and USD/JPY consolidated just below the 104.00 level with EUR/JPY above 126.0. Markets will monitor the US employment data for the impact on yields and the outlook for US fiscal policy.

The final UK PMI services-sector index was revised higher to 47.6 from the flash reading of 45.8 which offered some reassurance that the downturn in services triggered by renewed lockdown measures would be less severe than expected. Underlying confidence in the UK outlook remained fragile.

Political developments continued to have a major impact during the day with talks surrounding Brexit watched very closely. Source reports indicated that negotiators were edging closer to a deal, but there were still important sticking points, notably on fishing. There were also renewed concerns over a potential veto threat from France if the Commission conceded too much ground. Pressure for a short-term resolution continued to increase, especially with the contentious Internal Market Bill set to return to the House of Commons on Monday. Markets overall were optimistic that some form of deal would be put together and Sterling made net gains.

GBP/USD advanced to 2020 highs at 1.3500 at the European close with GBP/EUR rallying to near 1.1000. There was underlying selling interest at these key levels and Sterling was also hit by reports that talks had hit a fresh stumbling block. UK sources indicated that the chances of an imminent breakthrough had receded due to fresh demands from the EU side, but with little clear idea of the real position on the ground.

Volatility will inevitably be high of Friday with or without a breakthrough with pre-weekend position adjustment also a feature given the risk of a substantial gap at Monday’s Asian open.

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