Risk appetite held firm on Tuesday with markets looking through near-term coronavirus concerns.

Risk appetite held firm on Tuesday with markets looking through near-term coronavirus concerns. Wall Street equities posted solid gains, although with an element of caution ahead of the Georgia Senate elections. Futures were slightly lower on Wednesday The dollar continued to lose traction amid expectations of strong demand for other assets and negative sentiment amid expectations of more aggressive US fiscal stimulus.

EUR/USD moved to 32-month highs above 1.2300 as US currency weakness dominated. Sterling stabilised despite on-going coronavirus concerns with markets looking for a recovery later in 2021 and GBP/USD strengthened to 1.3650.

Commodity currencies posted strong gains amid a weak US dollar. Gains in oil prices also underpinned the Canadian currency.

German retail sales increased 1.9% for November following a 2.6% gain the previous month with a 5.6% annual increase. Latest labour-market data was also stronger than expected with an unemployment decline of 37,000 for December following a revised 40,000 decline the previous month and compared with consensus forecasts of a 10,000 increase. Euro-zone M3 money supply growth increased to 11.0% in the year to November from 10.5% previously and above consensus forecasts of 10.6%, although private-sector loans growth edged lower to 3.1% from 3.2%.

There was no significant impact from on-going euro-zone coronavirus concerns as Germany extended lockdown measures with Euro sentiment holding firm.

The US ISM manufacturing index strengthened to 60.7 for December from 57.5 the previous month. This was above consensus forecasts of 56.7 and the strongest reading since March 2018. There was strong growth in new orders and production for the month and there was a small increase in employment for the month. Prices increased at a much faster pace on the month and the strongest reading since June 2018.

The Euro overall was initially held in narrow ranges with EUR/USD support just below the 1.2250. The US currency gradually lost ground as commodity currencies secured fresh gains and EUR/USD edged higher. The US dollar remained under pressure into the New York close with EUR/USD testing the 1.2300 area. The US currency dipped to fresh 32-month lows in Asia on Wednesday before securing slight relief with EUR/USD at 23-month highs around 1.2330.

The dollar was unable to gain any support from the stronger than expected ISM manufacturing data and remained on the defensive during the European session with a USD/JPY retreat towards the 102.75 area. Wall Street equities made further headway during the day with indices recouping losses seen on Monday, although there was still an element of caution ahead of the Georgia Senate election run-offs with USD/JPY dipping below 102.80.

Exit polls indicated a very tight outcome and counting in Georgia continued during the night, although the Democrats appeared to be on course to win both seats which would give the party effective control of the Senate and generate expectations of a more aggressive fiscal stimulus. Congress will hold a formal joint session on Wednesday to certify Biden’s Presidential election victory on Wednesday with some Republicans expected to vote against. There are also some concerns over mass protests in Washington. There will be the potential for choppy trading later in the day amid US political developments.

The US 10-year bond yield moved above 1.00% to 10-month highs, although the dollar failed to gain significant benefit from higher yields.

China’s Caixin PMI services index declined to 56.3 for December from 57.8 previously and below consensus forecasts of 58.0. There were renewed concerns over the coronavirus situation in Japan with Tokyo reporting a record increase in new cases. Overall, USD/JPY declined to fresh 9-month lows at 102.60 before a slight recovery.

There were no significant UK data releases during the day with markets focussing on coronavirus developments and global risk conditions. Although there was unease over the impact of fresh lockdown restrictions in England and Scotland, the UK currency was resilient during the day with markets looking for a recovery later in the day.

The UK currency also managed to resist selling pressure despite renewed speculation that the Bank of England would move to introduce negative interest rates.

There was some evidence of underlying institutional buying given that a no-deal trade situation had been avoided and a reversal of no-deal hedges. The firmer tone surrounding global risk appetite was also a significant factor underpinning the UK currency amid expectations of a global recovery in 2021. GBP/USD traded above 1.3600 on Wednesday and tested 1.3650 amid further dollar weakness with GBP/EUR around 1.1080 as tight ranges prevailed and solid risk conditions underpinned the UK currency.

Economic Calendar