Risk appetite gradually deteriorated again during Wednesday as confidence in the economic recovery declined.

Risk appetite gradually deteriorated again during Wednesday as confidence in the economic recovery declined. Weaker than expected Euro-zone data was particularly significant in undermining European confidence.

The dollar secured renewed defensive demand and short positions were cut with the dollar index at 2-month highs. The Euro also faded to 2-month lows below 1.1650. Sterling was able to demonstrate some resilience amid expectations of fiscal support measures.

Commodity currencies weakened sharply as a stronger dollar and risk vulnerability undermined confidence.

According to flash data, the September German PMI manufacturing index strengthened to 56.6 from 52.2 and above consensus forecasts of 52.5, but the services-sector index declined to 49.1 from 52.5 previously and below expectations. There was a similar pattern for the Euro-zone as a whole with the manufacturing index at 53.7 from 51.7 while the services-sector index retreated sharply to 47.6 from 50.5. The data reinforced market concerns that a renewed increase in coronavirus cases was undermining activity in the services sector. There was a wider dip in confidence over the outlook, especially with further restrictions coming into force. In this environment, overall Euro sentiment remained fragile with the currency drifting lower amid a further paring of long Euro positions.

The US manufacturing PMI index increased slightly to 53.5 from 53.1 and slightly above consensus forecasts while the services-sector index edged lower to 54.6 from 55.0 previously and in line with expectations. Rhetoric from Federal Reserve Chair Powell was little changed from the previous day.

Fed vice-chair Clarida stated that the central bank is not even thinking of raising interest rates until actual inflation is at 2%. Any judgement on any inflation overshoot will be made closer to the time. He reiterated that inflation needed to spend some time with inflation above 2% to offset time spent below this level.

The comments from Chicago head Evans were more dovish than on Tuesday as commented that inflation should be at 2.5% for some time if the Fed is doing its job right. The US currency was resilient despite the relatively dovish Fed comments with EUR/USD dipping below 1.1650.

The dollar secured defensive support as risk appetite slipped again with commodity currencies coming under sustained pressure once again. The dollar maintained a firm tone on Thursday as global risk appetite remained fragile and continued to fuel US demand with the Euro held around 1.1650.

US equities remained on the defensive on Wednesday, although the yen was unable to gain any significant support. USD/JPY strengthened to the 105.40 area and the Japanese currency also lost ground on the main crosses. There was some evidence that weakness in precious metals had some negative impact on the yen.

Boston Fed President Rosengren stated that the coronavirus pandemic was likely to get worse over the next few months with economic activity liable to increase. There would also be the risk of a credit crunch if there is an increase in bad loans within the commercial real estate sector.

There were fresh doubts whether there would be any fiscal stimulus ahead of the election with Congress potentially set to enter recess at the end of this week. There were also fresh concerns over the risk of a disputed Presidential election result which hampered risk appetite. US futures retreated on Thursday and Asian markets also posted net losses with no major Japanese developments. The dollar and yen both gained an element of support with USD/JPY around 105.35.

The September flash PMI data for the manufacturing sector retreated to 54.3 from 55.2 while there was a steeper decline in the services sector to 55.1 from 58.8 while overall business confidence declined to a 4-month low amid underlying reservations over the impact of coronavirus reservations. Employment also continued to decline on the month, although the rate of job losses did slow. There was some relief that an even steeper rate of slowdown was avoided.

Chancellor Sunak will announce economic-support measures on Thursday and an extension of loan guarantees and it was also announced that there will be no budget statement this year. Sunak is expected to provide wage-support measures to cushion the impact of ending the furlough scheme and provide some wider support.

These expectations provided an element of Sterling support and there were also some tentative hopes surrounding the possibility of progress in Brexit talks.

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