This week the dollar declined against all other G-10 currencies. The EUR/USD pair rose strongly from the 1.17 boundary. The rebound faded near 1.19 and around the high observed on September 21st. The recent rally is taking a breather for now, and a near term consolidation around the 1.18 mark should be expected. The latest developments show one thing beyond doubt: market participants are extremely reluctant to commit to a particular direction in the wake of looming US presidential elections and ongoing fiscal package negotiations.
The divergence in COVID-19 new cases dynamics might also be at play, as well as fears of poor eurozone PMIs readings. The data disappointed in September, as the services index fell below the 50 threshold again, pointing to a decline in activity. The uncertainty was whether October would look any better given the return of some COVID-19 restrictions as new cases had accelerated since the September report.
German manufacturing shows resilience
In the light of flash October PMIs Germany’s recovery looks the most resilient, but mainly due to its dependence on manufacturing. The picture of the two-speed economy remains intact as the services sectors all around Europe are hurt by the return of restrictions. For now, Germany stands out as the strongest economy in the single currency area, yet the growth in manufacturing is set to weaken. Overall the PMI reports that came in were not as bad as some feared and therefore posed no threat to the euro. Now the focus returns to US politics. The final presidential debate had barely any implications for FX markets. Investors remain on watch for progress on the fiscal front. A deal before the election still seems to be highly unlikely.
The sterling flies high on continuation of the negotiations
The pound sterling is the main outperformer of the week as markets cheer for the resumption of Brexit talks with the aim of reaching an agreement by mid-November. The cable (the GBP/USD pair) jumped to the highest levels in over a month and briefly traded above 1.3150. There is an undeniable asymmetry: bad news hurts the sterling less than good news lifts the currency. The GBP’s rally also proves that numerous market participants perceive the political mess observed over the past few weeks as part of a negotiation strategy rather than as an indication that a no-deal outcome is inevitable. Therefore, a favourable outcome for the sterling, i.e. a last-minute agreement, is widely expected. However, it is not all downhill from here. The British government has an urge to display its political power, and it will result in volatile trading. It is also worth noting that the USD weakness pushed the USD/JPY pair below the 105 mark. The yen strength is a growing cause for concern for the Japanese government, which already verbally intervened in the summer.
Business as usual, the lira sets new lows
To find a clear underperformer one should look in the emerging markets space. The Turkish lira extends its losing streak. The USD/TRY pair has been posting new all-time-highs for the ninth week in a row now. On Thursday the lira plunged (at worst over 2%) as the central bank chose to stay put while another hike had been widely expected.