Risk appetite held firm on Tuesday with on-going coronavirus vaccine optimism.

Risk appetite held firm on Tuesday with on-going coronavirus vaccine optimism, although with a slightly more restrained tone after sharp gains. There were reservations over short-term coronavirus developments as US hospitalisation increased further.

European equities made further net gains to 8-month highs, although US stocks stalled. The dollar stabilised during the day with a lack of defensive demand limiting support. The Euro was supported by approval of the EU recovery fund, although with a lack of traction given the low level of yields and no net change in EUR/USD.

Sterling secured posted 2-month highs on hopes for a lift to the global outlook and an EU trade deal. The Australian dollar secured net gains as overall risk appetite held firm. The Canadian dollar was unable to make headway despite favourable market moves.

The German ZEW economic sentiment index declined to 39.0 for November from 56.1 the previous month and below consensus forecasts of 41.8 while the current conditions index edged weaker to -64.5 from -59.5 in October. The wider Euro-zone sentiment index dipped to 32.8 for November from 52.3 the previous month.

The Euro was unable to make any impression and EUR/USD dipped to lows below 1.1780 amid short-term unease over Euro-zone developments.

The US NFIB small-business confidence index was unchanged at 104.0 for October and above consensus forecasts of 102.2.

The JOLTS recorded a small increase in job-openings to 6.44mn from 6.35mn the previous month, but slightly below consensus forecasts. Elsewhere, the IBD consumer confidence index declined to 50.0 for November from 55.2 previously. Data had little impact given the focus on coronavirus developments.

After the New York open, the European Parliament and EU governments reached a deal on the 2021-2027 budgets which included the EUR750bn recovery package. The agreement boosted confidence in the Euro-zone 2021 recovery outlook which also cushioned the Euro.

Boston Fed Governor Rosengren stated that more fiscal and monetary stimulus is appropriate and that it was crucial to provide support for small companies.

US yields edged lower after the Wall Street open which also limited fresh dollar support, although there was a limited correction in commodity currencies which helped protect the US currency.

Overall, the single currency recovered some ground following the EU budget approval, although there was a lack of momentum and overall yield spreads were still a significant element supporting the dollar. EUR/USD settled around 1.1825 in early Europe on Wednesday as commodity currencies advanced.

Global risk appetite held firm on Tuesday which limited the potential for yen support. US yields, however, moved slightly lower which limited the potential for further sustained US currency support and overall market volatility eased as traders considered the potential vaccine implications. USD/JPY was held below 105.50.

Markets continued to monitor US political developments as President Trump’s legal team continued to challenge the results in a few battleground states. Markets will monitor speculation surrounding Biden’s key appointments with a particular focus on the Treasury Secretary given the global implications.

Although there was further optimism surrounding medium-term vaccine developments, there were important concerns over the near-term outlook. US hospital admissions have surpassed their April peak and several states were looking to impose fresh restrictions on activity. US equity markets were unable to make headway, although future edged higher on Wednesday while the Chinese yuan held firm. Overall, USD/JPY edged higher to near 105.30 in early Europe.

The UK jobs data reinforced unease over labour-market trends, especially a sharp increase in redundancies. An extension of the furlough scheme provided an element of relief and Sterling was also protected by optimism that vaccine developments would help provide a key lifeline for the economy.

Bank of England Chief Economist Haldane stated that a vaccine could be transformational and also pointed out that there was no point in providing extremely strong policy support if communication stokes fearfulness. Vaccine hopes dampened talks of potential negative interest rates.

There were no substantive developments on Brexit trade talks during the day with markets optimistic that progress towards a deal would be made this week.

Global risk appetite held firm which helped protect the UK currency, especially with hopes that vaccine developments would provide important relief to the services sector next year.  GBP/USD strengthened to 9-week highs above 1.3250 and EUR/GBP rallied to 2-month highs above 1.1250 before a correction.

The latest UK GDP data will be released on Thursday with the potential for a strong rebound in the third quarter offset by underlying concerns over the fourth-quarter relapse. Sterling held firm on Wednesday with robust risk appetite still an important element in providing support as GBP/USD traded near 1.3280.

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11:00 Monthly Oil Market Report
12:00 USD MBA Mortgage Applications 3.80%
13:00 European Central Bank President Lagarde Speaks
13:30 ECB Luis De Guindos Speaks
16:00 ECB Lane speech

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