Caution prevailed on Tuesday with increasing reluctance to engage in aggressive positions ahead of next week’s US elections.

Caution prevailed on Tuesday with increasing reluctance to engage in aggressive positions ahead of next week’s US elections. US equities were mixed with limited net losses for the S&P 500 index. Confidence in the Euro-zone outlook weakened as coronavirus cases surged while France and Germany are set to announce fresh restrictions today.

The dollar was hampered by expectations of medium-term losses. EUR/USD, however, weakened to below 1.1800 amid Euro-zone economic unease. Sterling was resilient and edged higher as hopes for a trade deal provided support.

Commodity currencies secured net gains and the Australian dollar posted gains after higher than expected inflation data.

Euro-zone M3 money supply growth accelerated to 10.4% in the year to September from 9.5% previously and strongest reading since June 2008. The data reinforced evidence that money supply is ample to fuel the recovery, although private-sector loan growth remained subdued at 3.1% from 3.0% previously.

There were still expectations that overall growth and inflation concerns would lead to a dovish ECB stance at Thursday’s policy meeting.

US durable goods orders increased 1.9% for September after a 0.5% gain previously and above consensus forecasts of 0.4%. Underlying orders increased 0.8% on the month after a 1.0% gain for August with a solid increase in capital spending.

Consumer confidence declined slightly to 100.9 for October from 101.3 previously and below consensus of 102.0. There was a significant advance for the current conditions component and respondents were more confident in the labour market trends, but the expectations index declined.

The Richmond Fed manufacturing index strengthened to 29 for October from 21 previously with a strong reading for new orders and the labour-market indicators also tightened on the month. Data releases continued to have little impact with markets continuing to focus on the US Presidential and Congressional elections next week.

There were further concerns surrounding Euro-zone coronavirus developments with reports that French President Macron was no longer ruling out a national lockdown. The single currency was initially resilient despite these concerns and the US dollar lost ground against commodity currencies, but EUR/USD was unable to make significant headway. The Euro also lost ground after the European close amid rumours that France was considering a month-long national lockdown. With expectations that Germany would tighten restrictions on Wednesday, EUR/USD retreated to below 1.1800 and maintained a defensive tone on Wednesday with a dip to 1.1770.

European equity markets moved lower on Tuesday and US markets also surrendered early gains which provided an element of yen support on the crosses. Overall, USD/JPY retreated to below 104.50 amid wider losses and a decline in US Treasury yields.

China’s central bank announced that it would drop the counter-cyclical factor in setting the daily fixing. There was some speculation that this would weaken the yuan slightly and potentially offer some dollar support. The Chinese currency did lose ground on Wednesday, although wider risk factors dominated market sentiment.

US futures edged lower on Wednesday, although Asian bourses were mixed. There was further uncertainty over the US election developments with markets adopting a more defensive stance, especially given unease over the risk of a disputed election outcome and traders adopted a more defensive stance.

The yen continued to secure defensive support with USD/JPY dipping to 5-week lows near 104.20. The Bank of Japan is not expected to make significant policy changes on Thursday, but markets will be wary over the risks of verbal intervention from the Finance Ministry.

The UK CBI retail sales index dipped sharply to -23 for October from 11 previously and well below consensus forecasts of 1. Sales are expected to decline again at a faster pace in November while orders placed with suppliers declined for the 18th successive month. The data maintained underlying concerns over spending trends.

Overall confidence in the economic outlook remained weak, particularly with further coronavirus restrictions undermining activity in the hospitality sector and potentially having a wider impact on confidence and activity. Sterling was, however, resilient with markets still expecting that some form of trade deal would be secured with the EU during November.

After the European close, EU Council President Michel stated that Brexit talks are at a most difficult point and markets inevitably remained extremely cautious over the outlook. GBP/USD, however, held steady on Wednesday to trade just above 1.3050 while GBP/EUR strengthened to near 1.1085.

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