EUR / USD
There was a small upward revision to the Euro-zone final manufacturing PMI index while German unemployment declined by 13,000 for the month with the unemployment rate at a record post-unification low. Underlying weakness in risk appetite continued to support the Euro in Europe with the dollar under pressure and the Euro continued to edge stronger. The October headline US ADP employment increase was lower than expected at 147,000 compared with consensus estimates of 166,000, but there was a sharp upward revision of close to 50,000 for the September release to 202,000 which was the strongest reading for seven months. The dollar was unable to gain any traction and continued to drift weaker during the US session as the Euro moved above the 1.1100 level for the first time in three weeks. There was no surprise with the Federal Reserve decision as interest rates were left on hold in the 0.25-0.50% range. There were minor changes to the statement with comments that the case for an increase in interest rates had strengthened further while the inflation rhetoric was slightly more hawkish. Overall, the Fed had still decided to wait for further progress in reaching its objectives. Although there were no specific references, the statement continued to indicate a December move to tighten. Market reaction was limited as there was no real change in Fed Funds futures and the dollar gained only temporary support as the Euro held above 1.1100 on Thursday with fresh three-week highs near 1.1125.
The dollar stayed under pressure on Wednesday as underlying risk conditions remained extremely fragile. As equity markets continued to slide, and defensive assets gained support, the US currency dipped to lows near 103.00. The Federal Reserve statement did not have a major impact with the dollar edging back to the 103.40 area as risk conditions attempted to stabilise. There were no major fresh developments surrounding the US Presidential election with most polls suggesting the race had tightened with the two candidates tied according to the latest ABC poll, although Clinton had an overall lead in tracking polls. China’s Caixin PMI services-sector index strengthened to 52.4 for October from 52.0 which underpinned confidence in the Chinese outlook. Overall risk appetite remained very fragile and the dollar dipped below 103.00 as sentiment remained weak while Tokyo markets were closed for a holiday which dampened trading volumes.
The construction PMI index was slightly stronger than expected with an increase to 7-month highs of 52.6 from 52.3 previously and compared with market expectations of a slight retreat. Residential construction strengthened, but overall confidence in the outlook weakened which will cause concern over investment levels. Sterling continued to gain support from short covering and moved above the 1.2300 level against the dollar, although this primarily reflected a weaker US currency as Sterling also weakened through 0.9000 against the Euro. The fragile tone surrounding risk appetite curbed potential support to some extent There is likely to be high volatility surrounding the Bank of England rate decision and inflation report with markets assuming that there will be no move to cut interest rates. An unexpected decision to cut rates would put Sterling under heavy pressure. The Court ruling on whether the UK government can trigger Article 50 without parliamentary approval is also due on Thursday ahead of the MPC decision and any ruling against the government could push Sterling higher.
After the strong gains recorded the previous day, the Swiss franc eventually corrected weaker on Wednesday with the Euro rallying to near 1.0800 from lows just above 1.0750 while the dollar found some support below 0.9700. There were suspicions that the National Bank was intervening to help push the franc weaker, but the currency still derived net support from the underlying fragile tone surrounding global risk appetite. There were no further losses for the Swiss currency on Thursday as lower global bond yields also curbed franc selling.