EUR / USD
The Euro gained an element of support on Tuesday from the firm tone in global equity markets. There were still underlying concerns surrounding the coronavirus situation as the number of cases in Europe continued to increase and further restrictions were imposed. There was also no positive in Brexit talks which maintained concerns over the Euro-zone economy. In this context, the Euro overall performance was particularly impressive as it posted significant gains into the New York open with a move above the 1.1800 level against the US dollar and strong gains on the crosses.
US housing starts increased to 1.42mn for September from 1.39mn previously, but slightly below consensus forecasts. In contrast, building permits strengthened to an annual rate of 1.55mn from 1.48mn and above market expectations of 1.52mn. The Philadelphia Fed non-manufacturing index strengthened to 25.3 for October from 20.4 previously and new orders remained in expansion territory, although there was a slowdown from September while the number of employees continued to increase.
Data releases continued to have little overall market impact with market attention focussed elsewhere.
The dollar was on the defensive amid longer-term reservations over the US fundamentals with the Euro around 1.1825 at the European close. Expectations of further US fiscal stimulus continued to underpin risk appetite on Wednesday which undermined demand for the dollar as the US currency index declined to 1-month lows. The Chinese yuan also strengthened to 27-month highs which underpinned the Euro and the single currency made further net gains to near 1.1850 against the dollar.
Risk appetite remained firm on Tuesday and the Japanese yen lost significant ground as markets maintained optimism over a potential fiscal stimulus package. The dollar advanced to the 105.70 area early in US trading, but then gradually lost ground amid the wider retreat with a retreat to below 105.50.
There were further meetings between Treasury Secretary Mnuchin and House Speaker Pelosi on a potential fiscal stimulus. A spokesman for Pelosi stated that the two sides had moved closer and will meet again on Wednesday. The rhetoric continued to underpin market sentiment as US equity futures posted further gains.
Bank of Japan board member Sakurai state that the central bank must take swift and appropriate action as needed if the economy’s recovery is delayed due to a pandemic. Asian equity markets were mixed as Chinese bourses lost ground and the yen was able to demonstrate some resilience with the dollar retreating to 105.30 despite an increase in US bond yields to 4-month highs which should provide an element of US currency support.
Bank of England MPC member Vlieghe stated that his own point of view was that the risks of negative rates being counter-productive were low. He considered that the downside economic risks appear to be materialising and that the outlook for monetary policy is skewed towards adding more stimulus. The remarks triggered fresh that the bank could opt for negative rates and with strong expectations of further measures at the November meeting with a potential increase in bond purchases.
The European Commission stated that it is willing to intensify trade talks with the UK and there were some unconfirmed reports that EU Chief Negotiator Barnier would come to London on Thursday. The UK government, however, repeated its position from Monday that there was no justification for re-starting talks at this stage and that the EU needed to make concessions before negotiations could resume.
Sterling secured a limited advance against the US dollar, but stalled below the 1.3000 level and the currency overall was on the defensive with the Euro strengthening to 2-week highs near 0.9140. The robust risk tone helped underpin Sterling on Wednesday as politics dominated. The Euro held firm around 0.9130 and political rhetoric will continue to be watched very closely in the short term. The CPI inflation rate increased to 0.5% from 0.2% and in line with consensus forecasts with the core rate at 1.3% from 0.9% while the September budget deficit increased to £36.1bn from £7.7bn last year. There was little impact with Sterling near 1.2980 against a fragile dollar.
The Swiss franc lost some ground on Tuesday, although there was still a significant element of resilience and the currency out-performed the Japanese yen. The Euro strengthened to highs above 1.0730 before fading slightly while the dollar retreated to lows below 0.9060.
The franc gained an element of support from gains in precious metals amid long-term expectations of currency debasement. The Swiss currency edged lower on Wednesday amid optimism over a fiscal stimulus, although the Euro was held around 1.0730.