Risk appetite strengthened on Tuesday with hopes of a decisive US election outcome.

Risk appetite strengthened on Tuesday with hopes of a decisive US election outcome. Equity markets posted strong gains in the Europe and the US. The dollar lost ground EUR/USD posted significant gains to above 1.1700.

Trends briefly extended at the Asian open before a sharp reversal as President Trump out-performed opinion polls and won in Florida. There will be no immediate result in the Presidential and Senate elections. US futures failed to hold gains while Asian markets were mixed. The dollar overall posted net gains with as risk appetite and expectations of fiscal stimulus faded.

Sterling was boosted by the favourable risk tone and was resilient even with no trade talks breakthrough, but GBP/USD failed to hold 1.3000. Commodity currencies posted strong gains on Tuesday before a rapid reversal amid a US recovery.

The Euro made significant gains ahead of Tuesday’s New York open as the US dollar lost ground. Overall risk appetite strengthened amid strong gains in equities and defensive demand for the US currency weakened. In this environment, EUR/USD strengthened to the 1.1700 area.

The October New York business conditions index strengthened to 65.1 from 56.1 previously while factory orders increased 1.1% for September after a 0.6% advance the previous month. There was no significant impact from the data as political considerations dominated market activity.

There were some reports that PEPP is likely to remain the principal channel of support in the fresh ECB December stimulus package, but the bank could use the APP purchases as well. Council member Schnabel commented that there was still scope to cut interest rates further.

The dollar remained on the defensive with EUR/USD peaking close to 1.1740 before fading. The dollar briefly lost further ground after the New York close with EUR/USD highs near 1.1770, but gains faded quickly amid evidence that President Trump was doing better than expected by the opinion polls and projected to win in Florida. The dollar regained strongly against the single currency and commodity currencies and EUR/USD dipped to lows near 1.1600 before settling below 1.1650.

Vice President Biden was ahead in the popular vote, but there was a high degree of uncertainty over undeclared states. The dollar held steady despite expectations that delayed counting would tend to weighted towards the Democrats. The Federal Reserve will announce its latest policy decision on Wednesday with no change expected.

There were sharp gains in equities ahead of the US open as risk appetite strengthened. Despite underlying uncertainty, there were expectations that the Democrats would win the US elections and sanction a substantial fiscal support package. The yen lost ground on the crosses, but the dollar gradually lost ground amid wider losses and USD/JPY traded around the 104.50 level into the New York close. US futures dipped lower as confidence in a clear election outcome faded. The yen struggled to gain ground on the crosses and USD/JPY strengthened to above the 105.00 level.

Bank of Japan Governor Kuroda stated that it is desirable for currencies to move in a stable manner, although there was little overall impact as US considerations dominated. Overall US bond yields moved lower which provided an element of yen support.

There had been some hopes that the Presidential outcome would be known early, but the full result may not be known for a few days, especially with delays in counting mail-in votes in key states such as Pennsylvania. The Senate outcome is also uncertain with indications that the Republicans may retain control, dampening fiscal stimulus expectations. There are also concerns over the risk of legal challenges and further delay given the tightness of the vote and USD/JPY settled just below 105.00.

The EU Commission stated that there was still no breakthrough on a level playing field and fishing in the EU/UK trade talks, although there had been progress in other areas. Talks will continue and EU Chief Negotiator Barnier is scheduled to update the EU Ambassadors on Wednesday. There was little overall Sterling impact with expectations that a deal would eventually be secured with talks set to continue over the next few days and into the weekend.

The UK currency posted notable gains as global risk appetite strengthened sharply. GBP/EUR rallied to 7-week highs around 1.1150 while GBP/USD gained further traction following the break above 1.3000 with further gains to above 1.3050 at the European close.

Sterling retreated from peak levels following reports that Barnier would signal that there was no breakthrough in talks, although there was solid buying on dips amid strength in risk appetite. There was sharp volatility surrounding the US election with a brief GBP/USD move to above 1.3100 before a sharp retreat. GBP/USD settled just below 1.3000 with GBP/EUR around 1.1150. There were strong expectations of further Bank of England quantitative easing this week.

Economic Calendar

Expected Previous
08:30 EUR German PMI Composite(OCT) 53.7 54.5
08:45 Markit/ADACI Svcs PMI(OCT) 48.8
08:50 Markit Serv PMI(NOV) 47.5 46.5
08:55 EUR German PMI Services(OCT) 48.9
09:00 Euro-Zone PMI Services(OCT) 46.2
09:00 Euro-Zone PMI Composite(OCT) 49.4
09:30 GBP PMI Services(OCT) 52.3
13:30 USD Trade Balance(SEP) -66.10B -67.10B
13:30 CAD Trade Balance(SEP) -2.00B -2.45B
14:00 USD ISM Non-Manufacturing PMI(OCT) 57.5 57.8
14:45 USD Markit PMI Composite(OCT 01) 55.5

*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.