Sterling remained volatile with mixed Brexit news as a Withdrawal Agreement was offset by no progress on trade talks.

Risk conditions were slightly more fragile on Tuesday, but confidence strengthened again on Wednesday despite a lack of progress on the fiscal stimulus. Equity markets were held in tight ranges with Wall Street posting small gains on vaccine optimism.

There was also subdued dollar trading with the dollar reversing gains seen in late Europe to trade weaker on Wednesday. EUR/USD found support just below 1.2100. Sterling remained volatile with mixed Brexit news as a Withdrawal Agreement was offset by no progress on trade talks. A boost to risk appetite underpinned GBP/USD. Commodity currencies gained fresh support on Wednesday as the US dollar lost ground.

The German ZEW economic sentiment index strengthened to 55.0 for November from 39.0 the previous month and above consensus forecasts of 45.5. The current conditions index edged lower to -66.5 from -64.3 previously and close to market expectations. The Euro-zone index strengthened to 54.4 from 32.8 previously and well above market expectations.

The data reinforced expectations that there would be a strong recovery if vaccine treatments prove effective which provided an element of Euro support, although there were still important reservations over the short-term outlook, especially with the risk of further restrictions in Germany.

The November NFIB small business confidence index declined to 101.4 from 104.0 previously as coronavirus restrictions had some impact.

The Euro edged higher after the German data, but was unable to gain any traction and narrow ranges prevailed. The dollar gained some protection from a slightly more cautious tone surrounding risk appetite, but was hampered by expectations that negative real interest rates would be sustained next year as the Federal Reserve maintains a very expansionary policy.

There was also an increased element of caution ahead of Thursday’s ECB policy meeting with some speculation that the central bank would look to be more aggressive in boosting monetary policy and could engage in a stronger attack against Euro strength. Overall, EUR/USD edged lower to just below 1.2100, but secured a renewed advance to 1.2130 on Wednesday as the dollar lost ground against European and commodity currencies.

 The dollar was held in tight ranges on Tuesday and USD/JPY edged higher in quiet conditions before settling little changed around 104.15 against the Japanese currency.

There were no comments from Federal Reserve officials with the blackout period still in operation ahead of next week’s policy meeting.

US equities eventually posted small net gains, although risk conditions were slightly more fragile amid unease over near-term coronavirus developments.

Markets also continued to monitor developments towards a fiscal stimulus package with Congressional leaders rejecting the latest proposals from the Administration amid a row of jobless benefits. Overall risk appetite held firm, however, as US equity futures made headway.

Japanese core machinery orders increased 2.8% in the year to October from a decline of 11.5% previously and substantially above consensus forecasts.

Chinese consumer prices declined 0.5% in the year to November from 0.5% previously and the first negative rate since 2009 which triggered some doubts over global reflation expectations. Overall risk appetite held firm, however, and USD/JPY edged higher to around 104.20 as tight ranges prevailed.

 There was further very choppy Sterling trading on Tuesday as markets reacted to Brexit-related headlines with implied volatilities hitting 8-month highs and market volumes also remained high. The UK currency gradually moved lower amid negative rhetoric from UK Prime Minster Johnson.

There was a boost early in US trading as the UK and EU secured an agreement on implementing the Withdrawal Agreement. Importantly this includes the Northern Ireland protocol and resolved the Irish border issue. In response, the UK confirmed that the contentious clauses in the Internal Market Bill would be taken out. This agreement was seen as an important boost to the process, especially given strong EU opposition to the clauses which would have broken international law. Sterling rallied, but GBP/USD failed to hold 1.3400.

Late in Europe, EU Chief Negotiator Barnier stated that the chances of a deal were slim and that no-deal was now more likely than sealing a new trade pact with the UK before December 31^st. Sterling dipped lower again, although there will be speculation that contingency measures will be implemented to alleviate disruption.

Sterling gained some support from confirmation in a peer review that the Oxford/Astra Zeneca vaccine is safe and effective.  After the European close, it was confirmed that Johnson would hold a dinner with EU Commission President von der Leyen on Wednesday evening.

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