Moody’s downgraded the UK credit rating to Aa3 from Aa2 due to a weaker growth outlook.

Risk appetite held steady on Friday, but major political and economic uncertainties continued to curb the potential for a major trend.

After little change on Friday, US equity futures posted gains on Monday with some support from solid monthly Chinese data. Global bourses were still mixed amid uncertainty over the global recovery.

The dollar was little changed with a firm tone amid uncertainty over the US fiscal stimulus potential. The Euro drifted weaker amid unease over the Euro-zone outlook as coronavirus developments undermined sentiment. Sterling dipped after the UK stated that preparations for a no-deal Brexit needed to increase amid a breakdown in talks with the EU. There was a recovery as dialogue will continue. Commodity currencies secured marginal gains as equities strengthened.

The Euro secured net gains into Friday’s New York open despite the negative developments surrounding a potential EU trade deal with the UK. There were also further concerns over the Euro-zone outlook as coronavirus cases continued to increase and restrictions were tightened. In particular, there was unease over the German outlook following tough warnings from Chancellor Merkel and Euro support gradually eroded later in the session as recovery fears increased.

US retail sales increased 1.9% for September compared with consensus forecasts of 0.7% and with a 5.4% annual increase. Underlying sales increased 1.5% on the month compared with expectations of a 0.5% increase and the control group recorded a 1.4% gain on the month.

Industrial production declined 0.6% for September after a revised 0.4% gain the previous month and substantially below market expectations of a 0.5% monthly increase. Manufacturing production also recorded a net decline on the month which created some uncertainty, although manufacturing surveys had suggested stronger conditions. The University of Michigan consumer confidence index strengthened slightly to 81.2 from 80.4 with a dip in current conditions offset by a gain in expectations.

EUR/USD was unable to break above 1.1750 and drifted lower into the European close amid underlying concerns over the Euro-zone outlook. According to CFTC data, there was only a small decline in long Euro positions in the latest week, maintaining the threat of a position squeeze. ECB President Lagarde stated that new coronavirus restrictions will heighted economic activity with markets expecting further stimulus measures. EUR/USD traded just above 1.1700 in early Europe on Monday.

Bank of Japan member Wakatabe commented that the bank does not target the exchange rate, but that they were following FX very closely. There was little immediate market impact with USD/JPY held in very tight ranges below 105.50 against the Japanese currency.

There were no decisive developments surrounding a US fiscal stimulus during the weekend. President Trump stated that he wanted a larger than expected fiscal stimulus while House Speaker Pelosi stated that Tuesday was the deadline for reaching an agreement for a deal.

China’s GDP data recorded a 4.9% increase in the year to the third quarter from 3.2% previously, but below consensus forecasts of 5.5%. Industrial production increased 6.9% over the year from 5.6% previously and above expectations of 5.8% with the retail sales data also above expectations at 3.3%. The data overall increased confidence in the Chinese growth outlook and helped underpin risk appetite, although USD/JPY continued to trade just below the 105.50 level.

Ahead of Friday’s New York open Prime Minister Johnson declared that the EU was not prepared to grant a Canada-style free-trade agreement and talks were effectively over. In this context, he stated that the UK needed to prepare for an Australia-style free-trade arrangement and no formal trade deal unless the EU made a fundamental change of approach. Sterling declined sharply on the news, but it regained some ground as Johnson did not close the door on further talks. The EU stated that it would come to London this week to continue talks with EU Commission President von der Leyen stating that they were still working for a deal. Markets assumed that this was a negotiating tactic, especially given economic pressures to secure a deal, but uncertainty remained extremely high.

GBP/USD dipped to lows near 1.2860 before edging back above 1.2900. Late in Europe, the UK stated that the EU team should not come to London, but EU Chief Negotiator Barnier and Frost will talk on Monday.

Moody’s downgraded the UK credit rating to Aa3 from Aa2 due to a weaker growth outlook, an erosion of fiscal strength and weaker UK institutions. Sterling held steady on Monday as firmer global equities underpinned support and there were some reports that the Internal Market Bill could be withdrawn, although uncertainty over Brexit developments remained extremely high with a downbeat economic assessment from Bank of England Governor Bailey.

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