Risk appetite was more fragile on Tuesday with fresh coronavirus vaccine concerns and no progress on a further US fiscal stimulus.

Risk appetite was more fragile on Tuesday with fresh coronavirus vaccine concerns and no progress on a further US fiscal stimulus. US equities moved lower which sapped support for global bourses. The dollar secured a fresh element of defensive support amid the less confident risk tone.

The Euro moved lower, not helped by increased Euro-zone coronavirus concerns, with EUR/USD retreating to below 1.1750. Sterling retreated as Brexit negotiations failed to make a breakthrough and domestic recovery concerns continued to mount. Commodity currencies lost ground amid the firm US dollar, although CAD was resilient.

The German ZEW economic sentiment index declined to 56.1 for October from 77.4 the previous month and below consensus forecasts of 73.0. There was a slight improvement in the current conditions index to -59.5 from -66.2 previously. There was a monthly decline in the Euro-zone index and the data overall maintained concerns that the recovery overall would stall amid a renewed increase in coronavirus cases. In this environment, the Euro gradually lost support into the US open.

The US NFB small-business confidence index strengthened to 104.0 for September from 100.2 previously and above consensus forecasts. Most indicators strengthened on the month, although uncertainty also increased.

US consumer prices increased 0.2% for September following a 0.4% increase previously and in line with consensus forecasts with the year-on-year rate at 1.4% from 1.3%. The core increase also met market expectations at 0.2% with the annual rate fractionally below market expectations and unchanged at 1.7%. There were no significant implications for monetary policy with the Fed not considering any changes in interest rates.

San Francisco Fed President Daly stated that monetary policy will remain very supportive and also noted that the Fed will not trade millions of jobs to avoid lifting stocks.

The Euro remained on the defensive during US trading and the dollar gained renewed support amid a more fragile risk trend. Commodity currencies lost ground and EUR/USD retreated to lows near 1.1730 at the European close. European concerns persisted with Germany recording the sharpest increase in new coronavirus cases since early April. EUR/USD held below 1.1750 on Wednesday as the dollar held a firm tone and the Chinese central bank resisted yuan gains.

The decline in US equities had a significant impact in limiting any selling pressure on the Japanese currency on Tuesday as markets adopted a more defensive tone.

The IMF upgraded its 2020 projections for the global economy slightly, but warned that it was prone to setbacks and the 2021 forecast was downgraded slightly.

Republican Senate majority leader McConnell stated that there would be one last attempt to secure a fiscal stimulus package ahead of the elections, but there were still substantial differences between the parties and market confidence in agreement faded which hampered risk appetite. There were also fresh concerns over a potential setback in coronavirus vaccine hopes as trials were halted. Overall, USD/JPY edged back above the 105.50 level against the Japanese currency.

Opinion polls continued to record solid leads for Democrat candidate Biden in the US Presidential election and markets will also be watching developments in the Senate contests closely given the potentially crucial impact on fiscal policy. Overall, the yen secured limited net gains with USD/JPY held below 105.50.

Sterling was unable to gain support from the labour-market data, especially with fears that the unemployment would increase sharply over the next few months.

EU Chief Negotiator Barnier stated that some progress had been made in trade talks with the UK, but not enough headway had been made to enter the ‘tunnel’ of intensive negotiations. Irish Foreign Minister Coveney also stated that there were still major difficulties over fishing, but he also considered that a deal was possible.

The German EU Minister called for the UK to make substantial progress as political rhetoric intensified. Sterling edged lower following the reported Barnier comments and was unable to regain ground, especially after a GBP/USD retreat to below 1.3000.

The UK currency moved lower again in New York, primarily due to the weaker tone in risk appetite and a stronger dollar. Sterling was also unsettled by further scientific and political calls for two-week lockdowns. Labour Party leader Starmer openly called for such a measure and there were fresh rumours that the government would engage in another U-turn.

In this environment, GBP/USD dipped to near 1.2950 against the US currency while GBP/EUR fell from one-month highs near 1.1085. Sterling remained on the defensive on Wednesday with GBP/USD dipping to near 1.2900 amid further reservations over trade and coronavirus developments.

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