Expectations of sustained monetary support underpinned sentiment.

Risk appetite recovered some ground on Wednesday amid hopes for targeted fiscal US support measures. Expectations of sustained monetary support also underpinned sentiment although caution was still a key element, especially given coronavirus developments.

Wall Street equities posted significant net gains with global indices mixed. The dollar edged lower against European currencies with EUR/USD trading above 1.1750.

Commodity currencies secured limited net gains as US dollar demand faded. Brexit headlines contributed to choppy Sterling trading with solid risk conditions providing net protection.

There were further concerns surrounding Euro-zone economic developments on Wednesday and concerns that the recovery would fade, especially with fresh restrictions being imposed across many countries. ECB President Lagarde stated that the central bank need to maintain ample stimulus to reach its goal while an ambitious and co-ordinated fiscal response remains essential. There was further speculation that the ECB would launch further monetary stimulus by the end of the year with an extension to bond purchases and more attractive terms for funding. Expectations of further cuts in interest rates was limited which curbed Euro selling.

The dollar gradually lost some support during Wednesday as risk appetite attempted to stabilise and EUR/USD edged higher to the 1.1780 area, although there was little underlying conviction in currency moves with both units struggling for sustained fundamental support.

According to minutes from September’s Federal Reserve policy meeting, there was an upward revision to economic projections compared to the June meeting, but there was still a high degree of uncertainty. Most forecasts assumed further fiscal support and growth could decelerate at a faster pace without a new support package. In this context, there was some support for further monetary easing if fiscal support was missing. There was an extensive debate on forward guidance while most members considered that disinflation was a bigger threat than inflation despite some signs of rising inflation.

The dollar was unable to gain significant traction with the Euro securing slight net gains and the US currency drifted lower on Thursday amid a lack of defensive demand with EUR/USD trading around 1.1770.

US equity futures regained further ground ahead of Wednesday’s New York open amid hopes that fiscal negotiations could resume. The yen gradually lost traction amid a steeper US yield curve and USD/JPY pushed to above the 106.00 level for the first time in over 3 weeks.

Chicago Fed President Evans stated that the central bank has the capacity to do more asset purchases, but doesn’t see the need currently while he also warned over economic scarring. The latest US consumer credit data triggered some fresh unease over spending trends with a sharp decline for August.

House Speaker Pelosi criticised President Trump for ending the stimulus talks and that it is a missed opportunity. There were some talks on a direct subsidy package for the airlines sector. US equities continued to post strong gains following the Fed minutes and futures moved higher on Thursday as markets more optimistic that some form of limited fiscal support package would be agreed, especially for airlines. Overall the yen edged lower with USD/JPY trading just below the 106.00 level.

Halifax reported a second successive monthly 1.6% increase in house prices with a year-on-year increase of 7.3% from 5.2%, the strongest rate since June 2016.

Irish Foreign Minister Coveney stated that EU Brexit negotiator Barnier would not enter the tunnel without a UK move on state aid and that there were major difficulties in fishing. UK Chief Negotiator Frost stated that progress was being made, but the UK would trade on Australia terms if agreement was reached. The UK government reiterated that a deal was needed by October 15th and that it would quit negotiations if no agreement was in place by then. According to sources, Barnier expects talks to extend beyond the 15-16th Summit as brinkmanship continued. Frost also hinted that fishing measures could be phased in. Markets were also uneasy over coronavirus developments with further restrictions introduced in Scotland and expectations of further measures in parts of England within the next few days.

GBP/USD dipped to lows around 1.2850 and GBP/EUR weakened to lows at 1.0920, although Sterling did recover some ground towards the European close with GBP/EUR rallying to 1.0980. Firmer global equities helped underpin the UK currency and trade rhetoric was slightly less abrasive despite disagreements.

The RICS housing index strengthened to 61% from 44% and the highest reading since June 2002 as the stamp-duty cut continued to spur activity. GBP/USD held above 1.2900 on Thursday as markets monitored Brexit and global risk trends.

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