The dollar faded from its best levels as sentiment remained negative.

After a tentative start, risk appetite gradually recovered ground during Wednesday. US equities posted a strong recovery which helped lift global bourses.

After making significant gains, the dollar faded from its best levels as sentiment remained negative. EUR/USD found support near 1.1750 and traded above 1.1800 ahead of Thursday’s ECB meeting. Sterling recovered from 4-week lows as risk appetite strengthened and the EU remained at the trade table.

Commodity currencies also recovered from initial losses as the US currency faded. The Bank of Canada pledged to maintain a very accommodative monetary policy, risk conditions dominated the Canadian dollar.

Oil prices secured a tentative recovery, although demand reservations continued. Precious metals posted limited net gains as the dollar faded. The Norwegian krone recovered with underlying inflation above expectations.

There were no significant Euro-zone data releases during Wednesday. ECB Council member Muller stated that a timely exit from emergency measures is important, although markets were focussed on the shorter-term outlook and Thursday’s policy meeting. Yields at the German 10-year bond auction declined slightly to -0.50% from -0.47% previously, limiting potential Euro support while global risk trends tended to dominate market moves.

The dollar maintained a firm tone into the New York open with the currency still gaining an element of defensive demand amid vulnerability in risk appetite. EUR/USD, however, found support just above the 1.1750 level and rallied into the European close as equities posted strong gains.

US developments remained limited with no significant data releases while the Fed remained silent ahead on next week’s policy meeting.

The dollar also lost wider support as commodity currencies rallied with EUR/USD recovering from 4-week highs and settling close to 1.1800.

There are no expectations that the ECB will make policy changes at Thursday’s policy meeting. Any changes to forward guidance will be watched closely and President Lagarde’s press conference will also be important. In particular, markets will be monitoring any comments on the Euro. A lack of concern would be likely to trigger at least short-term Euro buying. There is likely to be choppy trading during and after Lagarde’s press conference with EUR/USD around 1.1825 in early Europe.

USD/JPY continued to find support just below 106.00 in early Europe on Wednesday. US futures maintained a firmer tone and Wall Street equities posted strong gains after the market open. The Japanese yen lost defensive support and the dollar made limited headway, although gains were held to the 106.25 area.

House Speaker Pelosi suggested that the Republicans would not have the votes to pass the scaled-back fiscal support package. Coronavirus developments were monitored closely during the day with the US reporting over 1,100 deaths for the day which took the total to above 190,000. There were, however, reports that one vaccine could be ready by the end of October. US equity markets closed with strong gains, although futures edged lower on Thursday.

Opinion polls in Japan confirmed that Chief Cabinet Secretary Suga was favourite to win the LDP leadership election. The yen was little changed on the crosses with USD/JPY just above the 106.00 level and EUR/JPY trading above the 125.0 level as equity markets remained a key element.

Brexit trade considerations remained an important market element during Wednesday. There were reported comments from an EU Diplomat that the UK Internal Market Bill could have huge negative consequences. EU Commission President Von der Leyen stated that she was very concerned about UK intentions to breach the Withdrawal agreement. Sterling sentiment remained negative into the US open with GBP/USD sliding to fresh 4-week lows below 1.2900 as GBP/EUR dipped below 1.1000. Overall volatility remained at elevated levels during the day.

There were also comments from officials that the EU would not break-off trade talks which provided an element of relief, although uncertainty was still a key element. In this context, there were reports that the EU could consider legal action against the UK. The UK-EU Joint Committee will hold an extraordinary meeting on Thursday.

Risk conditions also remained an important influence with a strong recovery in global equity markets providing important Sterling support.

There was also an element of short covering after several days of selling pressure. As equity markets made net gains, the GBP/USD recovered to around 1.3000 while GBP/EUR retreated to 1.1000.

There were fresh trade concerns in Asia following comments from US House Speaker Pelosi that the UK Brexit move would imperil a UK-US trade pact. The RICS house-price index strengthened to 44% for August from 13% and above expectations of 25%.

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