Sterling was held in relatively tight ranges with Brexit trade hopes offsetting underlying economic reservations.

Risk appetite was more fragile on Monday with fresh concerns over coronavirus developments and diminished expectations of near-term US fiscal stimulus.

Wall Street equities dipped sharply, although sentiment attempted to stabilise on Tuesday amid longer-term expectations of aggressive fiscal support measures. The dollar gained an element of defensive support, but still struggled to make much headway and edged lower on Tuesday.

EUR/USD was able to hold above 1.1800 and was little changed amid expectations of a dovish ECB policy. Sterling was held in relatively tight ranges with Brexit trade hopes offsetting underlying economic reservations. Commodity currencies were dominated by risk trends with losses recovered on Tuesday.

The German IFO business confidence index declined to 92.7 for October from 93.2 previously and slightly below consensus forecasts. The current conditions component improved slightly to 90.3 from 89.2, but this was offset by a decline in expectations on the month. IFO economist Wohlrabe stated that companies are becoming more nervous as the number of coronavirus infections continues to increase. He also warned that closure of schools would have a massive impact on the economy. Concerns over Euro-zone coronavirus developments continued with a French government scientific adviser stating that there are some 100,000 new coronavirus cases a day. Official data recorded 50,000 cases and a positivity rate of 17%. There were also reports that German Chancellor Merkel was planning to announce increased restrictions this week, further dampening activity.

In its monthly report, the German Bundesbank stated that the economic recovery would continue during the fourth quarter of 2020, but at a much slower pace. According to the bank, output is around 5% below the level recorded in the fourth quarter of 2020. The Euro was unable to make any headway into the New York open.

The Chicago Fed National activity index declined to 0.27 for September from a revised 1.11 the previous month and below expectations of 0.60.

The dollar maintained a firmer tone with the dip in risk appetite contributing to an element of defensive demand, although EUR/USD was able to hold above the 1.1800 level.  A solid risk tone limited dollar support on Tuesday with the Euro also gaining some support from a stronger Chinese yuan. EUR/USD edged higher to 1.1825, although there was an important element of caution ahead of Thursday’s ECB policy meeting with dovish rhetoric expected from President Lagarde.

Japan’s Nippon Life stated on Monday that it would reduce investment in overseas bonds without currency hedges. This suggests that the company is not expecting the dollar to make headway over the next few months which could limit underlying support. Risk appetite remained weaker during Monday with US equities losing ground. Although USD/JPY briefly moved above the 105.00 level, it failed to hold the gains and retreated towards the 104.80 area.

Confidence over a near-term fiscal stimulus continued to fade with Senator Shelby stating that the odds of a pre-election deal very, very slim. Majority Leader McConnell formally announced that the Senate would be adjourned until November 9th, eliminating any chance of a fiscal boost ahead of the election.

Opinion polls for the Presidential election continued to indicate strong support for Biden while President Trump again alleged that there would be discrepancies in mail-in voting and potential legal challenges. Strong expectations of a Democrat clean sweep limited any negative market impact with expectations of a substantial fiscal package after the election. Risk appetite held firm on Tuesday with increased confidence in the Asian economy and a firm reading for Chinese industrial profits. Overall, USD/JPY drifted towards 104.70 with both currencies struggling for significant traction as caution prevailed.

Underlying confidence in the UK outlook remained fragile during Monday, although there were no major data releases during the day. The latest Yougov consumer confidence data recorded a decline to 101.3 from 102.4 previously and the first decline in five months which maintained reservations over the recovery outlook.

Brexit talks continued in London and UK government sources stated that there was still a lot of work to do to bridge significant gaps with the EU. Talks will continue until Wednesday and are then expected to continue in Brussels from Thursday. Markets overall continued to expect that some form of deal would be secured during November. GBP/USD found support below 1.3000, but failed to hold above 1.3050 and edged weaker overall.

Given the dip in risk appetite the currency was broadly resilient as GBP/EUR registered slight net gains to the 1.1020 area. Sterling drifted on Tuesday and with GBP/USD just above 1.3000 amid a slightly weaker US currency, although confidence in UK fundamentals remained fragile.

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