The dollar index dipped to 7-week lows before a tentative recovery.

Markets overall continued to wait for fiscal stimulus developments on Wednesday. Confidence in a pre-election deal faded with US equity futures losing ground. European bourses lost ground as recovery fears undermined support.

The dollar came under sustained pressure amid expectations of negative real yields over the medium term. The dollar index dipped to 7-week lows before a tentative recovery as risk appetite faded to some extent. EUR/USD advanced to 1-month highs around 1.1880 before retreating slightly to hold slight net gains on the day.

Sterling gained sharply as the UK and EU agreed to restart trade talks with a GBP/USD peak above 1.3150. Commodity currencies made net gains, although the Canadian dollar lagged amid weaker energy prices.

The Euro gained some support during Wednesday from fresh optimism that EU/UK talks would resume and that there could still be a Brexit deal.

The US currency was undermined by further speculation that there would be further US fiscal stimulus measures. Markets were expecting that the US inflation rate would increase due to support from higher spending while the Federal Reserve would cap nominal yields through sustained bond purchases. In this environment, real yields would remain negative and tend to undermine the US dollar.

Commodity currencies made significant gains during the day and the dollar overall declined sharply to 6-week lows amid longer-term fundamental concerns.

Fed Governor Brainard stated that the US recovery was highly uneven and highly uncertain. Premature withdrawal of fiscal aid would risk entrenching recessionary dynamics. According to Brainard, US rates are also likely to stay below neutral for a period after lift-off.

There were further concerns over Euro-zone coronavirus developments with Italy recording a jump in new cases to a record high of over 15,000 in the latest 24 hour period, reinforcing concerns that further restrictions would have to be introduced which would undermine the Euro-zone recovery.

EUR/USD still strengthened to 1-month highs around 1.1880 amid wider dollar weakness. German coronavirus cases increased to a fresh record high on Thursday, maintaining unease over the Euro-zone trends and EUR/USD retreated to around 1.1850 as the dollar pared losses.

Risk appetite remained firm ahead of Wednesday’s New York open, but the yen was resilient and posted significant gains. EUR/JPY dipped to lows just below 124.0 against the Japanese currency and there was sharp dollar selling amid wider vulnerability with 4-week USD/JPY lows below 104.50.

The Federal Reserve Beige Book reported that economic activity improved at a slight to moderate pace in the latest period with employment gains in most districts. There was further weakness in the commercial property sector which will cause unease over potential losses and write-offs within the banking sector.

Treasury Secretary Mnuchin and House Speaker Pelosi held further talks. Although there were some comments that differences between the two sides had narrowed, there was increased talk that any package will be delayed until after the elections.

Risk appetite was more fragile in Asa with equity markets moving lower and USD/JPY was held below the 105.00 level around 104.65, even though the yen failed to gain further support. Markets will be on alert for potential verbal intervention by Japan’s Finance Ministry, although ranges have been relatively narrow over the past few weeks. The third presidential election debate will be watched closely overnight.

Bank of England Deputy Governor Ramsden expressed concerns over the economic recovery with clear downside risks and particular concerns over the labour market. He also stated that the bank had considerable headroom to expand quantitative easing, but did not think that negative interest rates were an appropriate short-term tool.

In comments ahead of the New York open, EU Chief Negotiator Barnier reiterated that the EU was willing to intensify trade talks and ready to discuss all legal texts. Markets adopted an optimistic stance on the potential for talks to resume which pulled Sterling higher. After the New York open, there were reports that talks would resume on Thursday which triggered a further sharp UK currency advance. These reports were confirmed late in Europe with formal negotiations resuming next week.

Brexit considerations dominated and GBP/USD jumped to 6-week highs above 1.3150, the largest 1-day gain for 7 months, while GBP/EUR rallied to 1.1080.

The UK reported the highest number of daily coronavirus cases at over 26,000 in the latest 24-hour period and there were further concerns over major tensions over local restrictions. Concerns over the economic recovery will continue and Chancellor Sunak is expected to introduce further business support measures on Thursday. Sterling corrected slightly on Thursday amid a more fragile risk trend in global markets, although it held the bulk of gains with GBP/USD just below 1.3150.

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