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Daily FX Report

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EUR / USD

Currency markets were confined to narrow ranges ahead of Tuesday’s New York open with the dollar edging lower amid firm risk appetite. The Euro was hampered by fresh speculation that ECB President Lagarde would signal that the central bank would move towards further monetary easing, including the possibility that interest rates would be pushed deeper into negative territory. Bank chief economist Lane stated that the next few weeks would be critical and that a forceful fiscal response was needed. The Euro did test the 1.1800 area against the dollar, but failed to hold a brief move above this level.

ECB President Lagarde reiterated that the bank does not target the exchange rate, but is paying close attention to exchange rate developments.

The overall US trade deficit widened to a 14-year high of $67.1bn from $63.4bn the previous month and slightly above consensus forecasts as import growth out-stripped imports. JOLTS data recorded an increase in job openings of 6.49mn for August from 6.60mn the previous month.

Fed Chair Powell reiterated that all should be done to do what we can to manage downside risks to the outlook, there is still a long way to go in the recovery and the outlook remains highly uncertain. A weak recovery could also trigger normal recessionary dynamics. In this context, he noted that too little support would lead to a weak recovery while the risks of over-doing policy support seem smaller. The Fed chief reiterated that negative interest rates were not a tool that the bank was looking to use.

There was no further extension of risk appetite following Powell’s comments which limited scope for further dollar selling even though the comments remained dovish.

The dollar gained an element of defensive support late in US trading following the latest political developments with commodity currencies also moving lower. The Euro retreated sharply to lows around 1.1725 before a slight recovery on Wednesday while German industrial production missed expectations with a 0.2% for August decline.

JPY

Risk appetite held steady ahead of Tuesday’s New York open while the dollar was confined to narrow ranges against the Japanese currency. Markets were waiting for further developments surrounding President Trump and US fiscal policy. Dallas Fed President Harker stated that the policy response moving forward needed to be fiscal. The dollar settled around 105.65 at the European close as narrow ranges prevailed.

President Trump announced late in the New York session that he had ordered a halt to negotiations on coronavirus relief until after the election and accused House Speaker Pelosi of not negotiating in good faith. Given the focus on fiscal policy, there were renewed concerns over the US recovery outlook and US coronavirus cases also increased on the day. New York equities declined sharply as risk appetite deteriorated with fresh defensive yen demand as the dollar tested the 105.50 area.

There was a tentative recovery in risk in Asian trading after Trump stated that he wanted immediate action on airlines support and paycheck protection, although uncertainty remained intense given the volume of US political noise and on-going campaigning. The dollar settled around 105.70 in early Europe on Wednesday.

GBP

The UK PMI construction index strengthened to 56.8 for September from 54.6 previously and above consensus forecasts of 54.0. Overall confidence strengthened to a 7-month high and the rate of job losses slowed. Strength was led by the residential sector while civil engineering contracted again. Sterling edged higher following the data and there was a slight shift in money markets with a dip in expectations for negative interest rates but there was further selling around 1.3000 against the US dollar.

The UK currency dipped sharply ahead of the New York open following source reports that the EU would not make concessions on trade talks ahead of the October 15th EU Summit. There was a slide to lows near 1.2920 against the dollar while the Euro strengthened to 0.9125. The UK currency rallied on reports of a more positive assessment from other EU sources with comments that the last round of talks had made good headway. The sources also indicated that talks could extend beyond the EU October 30th deadline. Sterling dipped again as risk appetite deteriorated with a slide to below 1.2900 against the dollar while the Euro traded just above 0.9100.

CHF

The Swiss franc was little changed for most of Tuesday as narrow ranges prevailed. The Euro consolidated just below the 1.0800 level after again hitting selling interest close to this level while the dollar was held just above the 0.9150 level as overall activity was stifled.

Markets continued to monitor Euro-zone and US political developments, although overall currency ranges remained narrow. The Swiss currency gained some support as US equities dipped sharply, although moves were still relatively restrained with the dollar settling around 0.9180.

Contents

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