Violence in Washington dominated later in the day, although risk appetite held firm.

Risk appetite held strong for much of Wednesday on vaccine optimism and expectations of increased US fiscal stimulus. Violence in Washington dominated later in the day, although risk appetite held firm.

Wall Street posted gains, but retreated from its best levels while there were strong equity gains in Europe. ADP data recorded a decline in US employment for December, reinforcing near-term reservations over the outlook. Although the dollar recovered late in the US session, it remained vulnerable to trade just above 32-month lows.

EUR/USD settled below 32-month highs but above 1.2300. Sterling was unable to make headway amid domestic coronavirus fears. Global recovery hopes and equity gains provided some protection. Commodity currencies pared gains while US dollar weakness still provided net support.

The final reading for the Euro-zone PMI services-sector index was revised down significantly to 46.4 from the flash reading of 47.3 with the Italian index notably weaker than expected and signalling significant contraction. German consumer prices increased 0.5% for December with the year-on-year rate unchanged at -0.3%.

The US currency remained under pressure ahead of the New York open amid assumptions that US real interest rates would remain negative and inflation would move higher. The dollar index declined to the lowest level since March 2018 with EUR/USD peaking at 32-month highs at 1.2350.

US ADP data recorded a decline in private-sector payrolls of 123,000 for December following a revised increase of 304,000 the previous month and much lower than market expectations of a 90,000 gain as large companies cut jobs. The dollar regained some ground after the Wall Street open with some expectations that the US currency would be supported by stronger growth if there was a further increase in fiscal spending and EUR/USD edged back to the 1.2300 area.

Minutes from December’s Federal Reserve minutes illustrated divergence between the short and long-term outlook. There were near-term concerns over the outlook, although there was little enthusiasm for increasing bond purchases and a number of participants noted that there would be scope to taper purchases once substantial progress had been made in attaining Fed goals. The dollar briefly edged higher, but failed to hold the gains with EUR/USD settling around 1.2325 as Washington political drama escalated and dominated market sentiment. The US currency secured only an element of protection with EUR/USD above 1.2300 on Thursday.

In the Georgia Senate run-offs, Democrat candidate Warnock was projected to be the winner in early Europe. Just ahead of the New York open, fellow Democrat Ossoff also claimed victory against Republican incumbent Perdue. The dollar initially weakened sharply on the results with assumptions that there would be a Democrat-controlled Senate which would lead to a sustained boost to fiscal policy. Inflation expectations moved higher with higher bond yields.

Higher US yields did stem dollar selling and there was a sharp reversal after the New York open with USD/JPY at 103.30 from 8-month lows at 102.60.

The special joint session of Congress was quickly overshadowed by pro-Trump protests in Washington and tensions escalated rapidly as protesters entered the Senate building and forced an evacuation. Wall Street retreated, especially with reports that two major Chinese companies Alibaba and Tencent could be added to the banned list for US investors. The overall market impact of protests was measured with the Senate resuming debate on certifying Biden’s victory and net gains for equity futures.

Japanese cash earnings declined 2.2% in the year to November, the weakest figure for over five years which will increase fears over the spending outlook.

The dollar was able to draw some protection from higher yields and USD/JPY traded around 103.25.

The final reading for the UK PMI services-sector index was revised lower to 49.4 from the flash reading of 49.9. There were further concerns over the near-term outlook, although overall business confidence strengthened to the highest level for over six years with companies expecting a rebound during 2021.

Bank of England Governor Bailey stated that markets had broadly been expected the Brexit trade deal that was secured. Bailey made no comments on monetary policy, but there was further speculation that the central bank could adopt negative interest rates, especially with further near-term damage to the economy.

GBP/USD strengthened to highs at 1.3680, but reversed sharply in US trading with a slide back below 1.3550 while GBP/EUR posted one-week lows around 1.1010. The latest data recorded a record increase in new daily infections of over 62,000 with over 1,000 deaths reported for the day and there were further reports over the potential for major pressure on the health service.

GBP/USD did find support against the vulnerable dollar and regained 1.3600 in choppy trading as risk appetite held a firm overall tone. The UK currency faded again on Thursday with GBP/USD trading just below 1.3600 with EUR/GBP around 1.1020.

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