US political developments have dominated over the past 24 hours.

US political developments have dominated over the past 24 hours. The Democrats are unlikely to gain the Senate, but Biden edged towards a narrow Electoral College victory as Trump launched legal challenges. After initial vulnerability, equities recovered on a net improvement in global risk conditions. US and European equities made strong gains with Wall Street boosted by reduced expectations of corporate tax increases.

 The dollar retreated amid expectations that US and global monetary policy would remain extremely accommodative while other majors rallied. Chinese yuan gains helped underpin the Euro with net EUR/USD gains to near 1.1750.

 Sterling rallied as the Bank of England boosted QE more than expected, but resisted any moves to negative rates. Commodity currencies recovered to post limited net gains in choppy trading as risk conditions rallied.

 The final Euro-zone PMI services-sector index strengthened slightly to 46.9 from the flash reading of the 46.2, although this was still lower than the previous month.

 The Euro initially remained under pressure in European trading, but gradually regained ground as the US election count suggested that Democrat candidate Biden was eroding Trump’s advantage in key states. EUR/USD, however, was unable to challenge the 1.1750 level and there was further choppy trading.

 The dollar had lost ground ahead of the election amid expectations of a strong Democrat clean-sweep victory which would lead to aggressive fiscal stimulus and strong global risk appetite. With this result still in doubt, the US currency regained some territory with commodity currencies also vulnerable.

 EUR/USD traded above the 1.1700 level at the European close as dollar demand tended to fade once again as Biden edged towards securing an Electoral College victory. As election counts continued, Biden nudged ahead in key states, but Trump launched multiple legal suits to stop counts and to demand recounts. The most likely outcome is a narrow Biden victory, but without control of the Senate which would make Biden’s relationship with the Republican Senate crucial and stymie aggressive fiscal spending. The Federal Reserve will announce its policy decision on Thursday with no changes expected, although guidance will be monitored closely.

 There were further concerns over Euro-zone coronavirus developments with Germany posting a record daily increase in cases, reinforcing expectations of ECB action in December. The Chinese yuan posted net gains on Thursday which helped underpin the Euro and the dollar edged lower with EUR/USD around 1.1730.

 US ADP private-sector jobs data recorded an increase in employment of 365,000 for October from 749,000 the previous month and well below consensus forecasts of 650,000. The final September trade deficit declined to $63.9bn from $67.0bn the previous month as exports increased at a faster pace on the month.

 The final October PMI services-sector index strengthened to 56.9 from the flash reading of 56.0 and 54.6 previously.

 The ISM non-manufacturing index declined to 56.6 for October from 57.8 previously and below expectations of 57.5. There was also a slowdown in the rate of growth of output and new orders while there was only a marginal increase in employment. At this stage, political developments still dominated sentiment.

 There were strong expectations that the Democrats would not gain a Senate majority and US equities posted strong gains on expectations that any increase in corporate taxes and regulations would be blocked. Wall Street gains initially undermined the yen, but USD/JPY was unable to hold above 105.00 and faded to the 104.50 area.

 US 10-year yields declined to 3-week lows which hampered the US currency. The Bank of Japan increased its bond purchases on Thursday which suggested some reservations over Japanese yen gains. The dollar was unable to make headway and USD/JPY traded below 104.50 in early Europe.

 The UK PMI services-sector index was revised down to 51.4 from the flash reading of 52.3 and well below the previous month’s figure of 56.1. There was also a retreat in the composite index to 52.1 from 56.5 previously and the sharp slowdown reinforced fears over the outlook, especially given the impact of further lockdown restrictions. The House of Commons approved the 4-week lockdown for England despite some concerns over Conservative Party rebels.

 Ahead of the meeting, there were widespread expectations that the Bank of England would announce a further round of bond purchases and some speculation that it could announce negative interest rates which curbed Sterling support. There was choppy trading as US politics dominated during the day with GBP/USD consolidating below 1.3000 while GBP/EUR weakened to around 1.1075.

 The Bank of England held interest rates at 0.1% while the ceiling for bond purchases was increased to a total of £895bn from £745bn and above market expectations of £845bn. Sterling rallied on relief that negative rates had not been sanctioned with GBP/EUR around 1.1085 and GBP/USD moved back above 1.3000 although the bank downgraded the outlook and maintained a dovish stance.

Economic Calendar