Sterling declined sharply as the Bank of England edged closer to being able to implement negative interest rates.

Dollar short covering faded during Thursday with the US currency losing ground as underlying sentiment remained weak. The US currency was undermined by expectations of extremely low interest rates over the medium term.

EUR/USD edged towards 1.1850 despite reservations over the Euro-zone coronavirus developments. Global monetary policies provided protection for risk appetite.

Sterling declined sharply as the Bank of England edged closer to being able to implement negative interest rates. It recovered steadily from intra-day lows as the dollar faded. Commodity currencies posted net gains as US dollar losses dominated.

The dollar was unable to hold gains into the US open amid underlying negative sentiment. Following the Federal Reserve policy statement, there were strong expectations that interest rates would remain at extremely low levels for an extended period which continued to undermine sentiment.

Markets continued to monitor Euro-zone coronavirus developments amid unease over underlying trends, especially in France and Spain.

US initial jobless claims declined to 860,000 in the latest week from a revised 893,000 last week, although this was above consensus forecasts of 85,000. Continuing claims declined to 12.63mn from 13.54mn previously. There was, however, a small increase in total claims when the pandemic assistance numbers were included.

The Philadelphia Fed manufacturing index edged lower to 15.0 for September from 17.2 previously and was in line with market expectations. There were stronger increase for new orders and shipments on the month and unfilled orders secured a marginal advance. Prices increased at a faster pace and there was a stronger increase in employment. Confidence in the 6-month outlook also improved on the month. Housing starts edged lower to an annual rate of 1.42mn from 1.49mn.

The data had little overall impact with EUR/USD continuing to grind higher to the 1.1830 area at the European close.

The US currency continued to drift lower on Friday as the long-term lack of any potential increase in short-term rates continued to undermine sentiment. Position adjustment will be a factor into the weekend with the dollar unable to make headway in early Europe as the underlying lack of yield support continuing to curb underlying US currency support with EUR/USD just above 1.1850.

The dollar was unable to make any headway in Europe on Thursday and USD/JPY retreated to fresh 6-week lows near 104.50. US equities posted significant losses and there was no significant increase in longer-term bond yields which sapped underlying US currency support.

There was a slight recovery later in the day with markets wary of potential Japanese verbal intervention, although USD/JPY was held well below the 105.00 level.

Markets continued to monitor US fiscal developments, but there was no significant headway on securing a compromise bill and Wall Street equities closed lower.

Asian markets overall were able to make limited headway, although underlying caution prevailed. The dollar edged higher, although USD/JPY was held below the 105.00 level amid expectations that capital outflows from Japan would remain limited with EUR/JPY just above 124.0.

The Bank of England held interest rates at 0.1% following the latest policy meeting with the ceiling of bond purchases under the QE programme also maintained at £745bn. Both decisions were in line with consensus forecasts and there were 9-0 votes for no action. The bank stated that recent developments in the economy had been slightly stronger than expected, but there was a high degree of uncertainty over the outlook and it was unclear whether the performance could be sustained.

The bank noted economic risks if there was no Brexit trade deal and it also stated that the bank had started discussions on potential operations surrounding negative interest rates. The bank reiterated it was prepared to ease policy further if required. Overall, there were strong expectations of further stimulus in November and increased speculation over negative rates.

There were slightly more reassuring comments from EU officials over Brexit talks with Chief Negotiator Barnier and Commission President Von der Leyen stating that a deal was still possible, although Barnier also commented that the next few days could be crucial.

Sterling regained some ground with a fresh GBP/USD move towards 1.3000 with GBP/EUR around 1.0975. Overall sentiment remained fragile, especially with scientific groups recommending a second, short coronavirus national lockdown. UK retail sales increased 0.8% for August, marginally above consensus forecasts with a 2.8% annual increase. Further Sterling volatility is likely on Friday with GBP/USD trading above 1.2950 as the US currency lost ground.

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