Sterling outperformed amid reports that EU trade talks were making progress.

Risk appetite deteriorated sharply on Wednesday amid fears over coronavirus developments and nerves over the US election. European sentiment was undermined by fresh lockdown restrictions in France and Germany. US and European equities declined sharply with the German market at 5-month lows.

The dollar secured fresh defensive support as risk appetite dived. The Euro was undermined by coronavirus fears and EUR/USD dipped to lows near 1.1720. There was a tentative risk recovery on Thursday and the dollar partially retraced gains. Sterling outperformed amid reports that EU trade talks were making progress.

The Bank of Canada does not expect to raise interest rates until 2023. Commodity currencies declined sharply amid the slide in equities before a limited recovery.

Confidence in the Euro-zone outlook continued to deteriorate during Wednesday with expectations that France and Germany would announce new coronavirus restrictions which would have a further important dampening impact on the services sector and undermine the wider recovery.

The Euro was also undermined by a renewed slide in risk appetite with a further notable decline in equity markets reinforcing the more cautious tone.

The dollar attracted renewed defensive support while commodity currencies retreated rapidly and EUR/USD declined sharply to lows just below 1.1720.

The US goods trade deficit declined to $79.4bn for September from $83.0bn the previous month as imports edged lower with little overall impact.

Towards the European close, German Chancellor Merkel announced a four-week limited lockdown to take effect from November 2nd with the closure of bars and restaurants, although schools and shops will remain open. French President Macron also announced a fresh national lockdown from this Friday which will last until December 1st. He warned that the second wave would be worse than the first wave and there will be tough restrictions on movements.

There was caution ahead of Thursday’s ECB meeting given the potential for dovish rhetoric from the central bank and fresh reservations over the economic outlook.

There were also concerns over US coronavirus trends with a further warning over the outlook from white House advisor Fauci. The Euro stabilised on Thursday as risk appetite stabilised and the yuan edged higher, but underlying support was limited ahead of the ECB policy meeting later in the day with EUR/USD near 1.1750.

European equity markets declined very sharply in European trading on Wednesday and risk appetite deteriorated sharply. In this environment, the dollar and yen both secured significant defensive support with USD/JPY trading above the 104.00 level.

Former New York Federal Reserve President Dudley stated that the Federal Reserve is very near the point where it can’t do any more.

The Bank of Japan announced no change in monetary policy following the latest policy meeting with the short-term target at -0.1% and a target of around zero for the 10-year yield. The bank downgraded its GDP and inflation forecasts for the current year and also reiterated that risks were skewed to the downside. There was a continued commitment to the very supportive monetary policy, but the overall market reaction was limited.

The latest US opinion polls continued to indicate a solid lead for Biden, although overall market uncertainty increased with a reluctance to take aggressive positions.

US equity futures recovered in Asia which provided some relief and USD/JPY settled around 104.40 as yen support on the crosses faded slightly.

Sterling declined sharply into the New York open as global risk appetite deteriorated and market unease over domestic coronavirus developments increased. A GBP/USD decline through 1.3000 was significant in undermining confidence with a slide to lows near 1.2920.

After the New York open, there were reports that trade talks in London were making significant headway. Sources indicated that legal texts were being discussed on a level playing field and agreement was near on state subsidies. The sources added that there were still substantial differences overfishing. Nevertheless, there was optimism that a deal could be secured with intense talks over the next week.

Sterling jumped higher following the reports, but there were still important headwinds from weak global risk appetite. Sterling implied volatilities also increased to 5-week highs amid expectations of further short-term volatility. There were also further concerns over UK coronavirus developments.

There are widespread expectations that the Bank of England to announce further quantitative easing at next week’s policy meeting.

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