EUR / USD
The Euro was unable to make headway in early Europe amid reservations over the short-term outlook, although with some hopes that coronavirus cases were peaking.
In comments on Wednesday, ECB President Lagarde stated that all options are on the table, but the PEPP and TLTRO programmes have proved their effectiveness and can be dynamically adjusted to react to how the pandemic evolves. She added that these are likely to remain the main tools for adjusting monetary policy while the duration of stimulus is as important as the level. She also commented that developments in the exchange rate may have a negative impact on the path of inflation. The comments overall dampened expectations that the ECB could cut interest rates and she also reiterated that fiscal policy had to remain at the centre of the stabilisation effort. Council member Knot stated that the no options were excluded ahead of the December decision while the Bank of Spain head called for urgent action to stem deflation risks. Expectations of very aggressive measures in December were scaled back slightly, although the Euro continued to edge lower.
There were no major US developments during the day with a partial US holiday and the US currency resisted further selling.
The Euro was hampered by an increase in US yields during the day with increased speculation that the dollar relationship would move closer to changes in yields rather than risk appetite. After failing to hold above the 1.1800 level, the Euro retreated to 1-week lows below 1.1750.
The Euro recovered from its lowest levels as approval on the EU recovery fund underpinned sentiment and settled around 1.1770 against the dollar on Thursday.
China’s new loans declined sharply to CNY690bn for October from CNY1900bn the previous month and below census forecasts of CNY750bn. There was also a slowdown in annual M2 money supply growth to 10.5% from 10.9% previously and the data overall maintained expectations that the Chinese central bank was adopting a slightly less aggressive stance towards monetary policy which hampered risk appetite to some extent.
Activity in the New York session was dampened by the US bond market closure for a holiday, although equity markets were open.
Georgia announced that there would be a full hand recount of votes for the Presidential election. Markets continued to fret over near-term US coronavirus developments and the risk that any political momentum for Biden would be delayed by Administration obstruction. US yields held firm and the dollar edged above the 105.50 level.
US equity futures moved lower on Thursday and Chinese interest rates continued to edge higher which dampened risk conditions. Japanese core machinery orders declined 4.4% for September with an 11.5% annual decline which also curbed risk conditions and the dollar retreated to the 105.20 area before settling around 105.25.
EU source reports on Wednesday indicated that EU and UK negotiators would not be able to seal a trade agreement this week with the mid-November deadline missed. The sources added, however, that the aim was to complete a draft legal text by the middle of next week.
There were still underlying expectations that a deal would be reached, but reports of a delay served as a convenient trigger for a bout of profit taking after strong gains during Tuesday. There were also underlying concerns that the economy would be damaged next year even if a trade deal is in place.
Bank of England Monetary Policy Committee member Tenreyro stated that there is positive evidence of a negative interest rates policy in Europe. She has previously expressed a favourable stance towards negative rates, but others on the committee are notably less enthusiastic.
The UK currency retreated to just below 1.32 against the dollar from 2-month highs near 1.3300 while the Euro recovered from 5-month lows around 0.8860. UK GDP was estimated at 15.5% for the third quarter, slightly below expectations of 15.8%. The annual decline was 9.6% and the ONS pointed to a notably weak recovery in investment and momentum slowed for September. The overall market impact was limited with Sterling below 1.3200 against the dollar with the Euro around 0.8920.
The Swiss franc was able to resist significant losses against the Euro on Wednesday and gradually regained ground to trade back below the 1.0800 level. The US dollar strengthened to highs near 0.9190 before fading slightly as the franc regained ground.
Overall risk appetite held firm which limited potential buying support for the Swiss currency. Risk conditions were less buoyant on Thursday and the franc was able to resist further selling with the Euro retreating towards 1.0780 before stabilising while the dollar retreated to around 0.9165.