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EUR / USD

After a brief dip at the European open the Euro was held in narrow ranges ahead of Tuesday’s New York open. The single currency was hampered by dollar buying against Sterling amid a renewed tone of pessimism over Brexit trade deal negotiations. Reservations over near-term coronavirus developments also continued.

The US New York Empire manufacturing index edged lower to 4.9 for December from 6.3 previously and slightly below consensus forecasts of 6.9. There was a marginal increase in new orders while unfilled orders declined at a slower pace. Employment grew at a faster pace on the month and companies were slightly more optimistic over the outlook. Business surveys will continue to be watched closely in the short term and services will be more important than manufacturing.

Industrial production increased 0.4% for November with an increase of 0.8% for manufacturing output compared with market expectations of a 0.3% increase.

The US currency was seen as vulnerable on seasonal ground with the dollar tending to lose ground over the second half of December.

There was caution ahead of important events on Wednesday with the Euro-zone PMI business confidence data and Federal Reserve policy meeting. Markets will be watching Fed guidance amid speculation that there could be a shift in the bond-buying programme to increase purchases of longer-term bonds to cap yields.

The dollar overall was unable to make headway with fresh buying in commodity currencies and the Euro edged above 1.2150, although momentum was lacking. The dollar remained on the defensive in early Europe on Wednesday as risk appetite held firm with the Euro above 1.2150 and significant volatility likely later in the day.

JPY

Risk appetite was underpinned on Tuesday by the Moderna vaccine moving closer to regulatory approval. Markets continued to monitor fiscal stimulus developments during the day and there was increased optimism that agreement would be reached. Senate majority leader McConnell pledging to remain in session until a deal was reached with latest proposals centred on a $1.4trn package. Wall Street equities posted strong gains, but the Japanese yen still posted net gains and the dollar dipped to around 103.70. There was speculation of year-end repatriation flows to Japan which supported the Japanese currency.

There was further uncertainty over the fiscal stimulus with house Speaker Pelosi stating that a deal would be agreed on Wednesday, although there were complications with progressive Democrats warning that they would not support a bill that did not have direct payments to families.

Japan’s PMI indices remained in contraction territory for December, although risk conditions held steady. The dollar overall remained on the defensive and retreated to 5-week lows just below 103.50 as the yen resisted selling despite firm risk conditions with the euro trading below 126.0.

GBP

Sterling lost further ground in early Europe on Tuesday with concerns over the latest labour-market data as payroll declined in November. The UK currency dipped to lows below 1.3300 against the dollar as the Euro strengthened to near 0.9150 amid a lack of positive Brexit developments.

There was, however, a gradual reversal with the UK currency making net gains on hopes that Brexit trade deal negotiations were making headway in Brussels. Although there was a relatively downbeat tone from UK Prime Minister Johnson, the lack of rhetoric from Brussels suggested that serious talks were making headway.
Late in the European session, there were reports that talks on the level playing field had eased concerns within Conservative MPs and that a deal was now more likely.

Irish Prime Minister Martin took a more optimistic stance and market optimism over a deal increased with net Sterling gains even though uncertainty remained high.

The latest PMI business confidence data will be released on Wednesday ahead of Thursday’s Bank of England policy decision. The UK inflation rate declined to 0.3% for November from 0.7% and below expectations of 0.6% with the core rate declining to 1.1% from 1.5%, but political developments dominated.

Brexit hopes continued to underpin confidence with the UK currency trading around 1.3450 against the fragile dollar while the Euro traded around 0.9040.

CHF

The Swiss franc was again resilient during Tuesday despite generally positive risk conditions. Sentiment was boosted by positive developments surrounding coronavirus vaccines with equities making net gains and there was also an element of optimism over Brexit developments.

The Euro, however, was unable to make progress and held around 1.0770 with the dollar was trapped near 5-year lows just above 0.8850. The Swiss currency continued to resist selling pressure on Wednesday despite increased optimism over a potential Brexit deal and firm global risk appetite with the dollar touching 0.8850.

Contents

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