Sterling posted net gains after a slide in early Europe as Brexit optimism increased.

Risk conditions were firm on Tuesday amid increased expectations that a US fiscal support package would be approved in Congress. Wall Street equities posted strong gains with global bourses also making headway on 2021 recovery hopes.

The dollar overall lost further ground amid expectations of asset flows into alternative assets. EUR/USD settled above 1.2150 with dollar trends tending to dominate.

Sterling posted net gains after a slide in early Europe as Brexit optimism increased again with GBP/USD above 1.3450.

Global recovery hopes provided net support to commodity currencies. USD/CAD dipped to 31-month lows just below 1.2700 before a slight correction.

After a brief dip at the European open the Euro was held in narrow ranges ahead of Tuesday’s New York open. The single currency was hampered by dollar buying against Sterling amid a renewed tone of pessimism over Brexit trade deal negotiations. Reservations over near-term coronavirus developments also continued.

The US New York Empire manufacturing index edged lower to 4.9 for December from 6.3 previously and slightly below consensus forecasts of 6.9. There was a marginal increase in new orders while unfilled orders declined at a slower pace. Employment grew at a faster pace on the month and companies were slightly more optimistic over the outlook. Business surveys will continue to be watched closely in the short term and services will be more important than manufacturing.

Industrial production increased 0.4% for November with an increase of 0.8% for manufacturing output compared with market expectations of a 0.3% increase.

The US currency was seen as vulnerable on seasonal ground with the dollar tending to lose ground over the second half of December.

There was caution ahead of important events on Wednesday with the Euro-zone PMI business confidence data and Federal Reserve policy meeting. Markets will be watching Fed guidance amid speculation that there could be a shift in the bond-buying programme to increase purchases of longer-term bonds to cap yields.

The dollar overall was unable to make headway with fresh buying in commodity currencies and EUR/USD edged above 1.2150, although momentum was lacking. The dollar remained on the defensive in early Europe on Wednesday as risk appetite held firm with EUR/USD above 1.2150 and significant volatility likely later in the day.

Risk appetite was underpinned on Tuesday by the Moderna vaccine moving closer to regulatory approval. Markets continued to monitor fiscal stimulus developments during the day and there was increased optimism that agreement would be reached. Senate majority leader McConnell pledging to remain in session until a deal was reached with latest proposals centred on a $1.4trn package. Wall Street equities posted strong gains, but the Japanese yen still posted net gains and USD/JPY dipped to around 103.70. There was speculation of year-end repatriation flows to Japan which supported the Japanese currency.

There was further uncertainty over the fiscal stimulus with house Speaker Pelosi stating that a deal would be agreed on Wednesday, although there were complications with progressive Democrats warning that they would not support a bill that did not have direct payments to families.

Japan’s PMI indices remained in contraction territory for December, although risk conditions held steady. The dollar overall remained on the defensive and USD/JPY retreated to 5-week lows just below 103.50 as the yen resisted selling despite firm risk conditions with EUR/JPY trading below 126.0.

Sterling lost further ground in early Europe on Tuesday with concerns over the latest labour-market data as payroll declined in November. GBP/USD dipped to lows below 1.3300 as GBP/EUR strengthened to near 1.1054 amid a lack of positive Brexit developments.

There was, however, a gradual reversal with the UK currency making net gains on hopes that Brexit trade deal negotiations were making headway in Brussels. Although there was a relatively downbeat tone from UK Prime Minister Johnson, the lack of rhetoric from Brussels suggested that serious talks were making headway.

Late in the European session, there were reports that talks on the level playing field had eased concerns within Conservative MPs and that a deal was now more likely.

Irish Prime Minister Martin took a more optimistic stance and market optimism over a deal increased with net Sterling gains even though uncertainty remained high.

The latest PMI business confidence data will be released on Wednesday ahead of Thursday’s Bank of England policy decision. The UK inflation rate declined to 0.3% for November from 0.7% and below expectations of 0.6% with the core rate declining to 1.1% from 1.5%, but political developments dominated.

Economic Calendar

Expected Previous
07:00 GBP CPI (M/M)(NOV) 0.10% 0.00%
07:00 GBP CPI (Y/Y)(NOV) 0.60% 0.70%
07:00 GBP Core CPI (Y/Y)(NOV) 1.40% 1.50%
07:00 GBP PPI Core Output (Y/Y)(NOV) 0.4 0.5
07:00 GBP PPI Output (Y/Y)(NOV) -0.90% -1.40%
07:00 GBP PPI Input (Y/Y)(NOV) -2.50% -1.30%
07:00 GBP PPI Input (M/M)(NOV) 0.40% 0.40%
08:15 Markit Serv PMI(DEC) 38 38.8
08:15 Markit Mfg PMI(DEC) 49.6
08:30 EUR German PMI Services(DEC) 46
08:30 EUR German Manufacturing PMI (M/M)(DEC) 57.8
08:30 EUR German PMI Composite(DEC) 51.7
09:00 Euro-Zone PMI Composite(DEC) 45.6 45.3
09:00 Euro-Zone PMI Services(DEC) 41.7
09:00 Euro-Zone PMI Manufacturing(DEC) 53.8
10:00 Euro-Zone Trade Balance(OCT) 22.0B 24.8B
13:30 USD Core Retail Sales (M/M)(NOV) 0.20%
13:30 USD Advance Retail Sales (M/M)(NOV) 0.50% 0.30%
13:30 CAD CPI (Y/Y)(NOV) 0.40% 0.70%
13:30 CAD CPI (M/M)(NOV) 0.20% 0.40%
13:30 Bank of Canada Core CPI (M/M)(NOV) 0.40%
13:30 Bank of Canada Core CPI (Y/Y)(NOV) 1.00%
13:30 CAD Foreign Securities Purchase(OCT) 4.46B
13:30 CAD Wholesale Sales (M/M)(OCT) 0.40% 0.90%
14:45 USD Manufacturing PMI(DEC) 56.7
14:45 USD Markit Services PMI(DEC) 58.4
14:45 USD Markit PMI Composite(DEC 01) 58.6
15:00 USD Business Inventories(OCT) 0.70%
15:00 NAHB Housing Market Index(DEC) 85 90
19:00 FOMC Press Conference
19:00 USD FOMC Projections of Economy
19:00 USD FOMC Statement
19:00 FOMC Interest Rate Decision 0.25%
23:30 JPY National CPI (Y/Y)(NOV) -0.40%
23:30 JPY National CPI Ex-Fresh Food (Y/Y)(NOV) -0.70% -0.70%

*All rates shown are indicative of interbank rates and should only be used for indication purposes only. It is important to note that foreign exchange rates fluctuate and that rates may vary depending on the amount and the base currency that is purchased or sold. Rates are correct as of 8:00am UK time. CentralFX are not responsible for the rates shown.