Forex news from the European trading session - 21 October 2020
Headlines:
- UK PM Johnson: National lockdown is not the right policy
- UK PM Johnson: Areas with Tier 3 restrictions are already making progress
- US MBA mortgage applications w.e. 16 October -0.6% vs -0.7% prior
- UK says that Frost, Barnier to speak again later today
- EU's Barnier: Our stance on Brexit will not change
- UK government scientists said to have 'deep doubt' that Tier 3 restrictions will work
- Japan ruling parties reportedly agree on the need for a new stimulus package
- UK September CPI +0.5% vs +0.6% y/y expected
- Germany reports 7,595 new daily coronavirus cases in latest update today
Markets:
- GBP leads, USG lags on the day
- European equities lower; E-minis down 0.2%
- US 10-year yields up 2.5 bps to 0.811%
- Gold up 0.5% to $1,916.00
- WTI down 1.8% to $40.95
- Bitcoin up 3.1% to $12,275
There were few notable headlines on the session but the market was active amid the continued focus on US stimulus talks after the 'deadline' yesterday wasn't a deadline.
Mnuchin and Pelosi are slated to continue with talks today, but the market is looking to price in a stimulus package one way or another with bonds taking the lead.
There was a steepening in Treasury yields, with 10-year yields climbing to its highest level since early June to 0.834% early on before retreating slightly as stocks slumped.
US futures were more optimistic earlier on, holding ~0.6% gains but that fizzled mid-way through the session with European equities also falling by roughly 1% and erasing its earlier gains amid ongoing concerns about the virus situation in the region.
Despite that, the dollar was beaten up in the major currencies space as the move in bonds suggested that the market action goes beyond just the usual 'risk' narrative.
Hints of an early peek into the reflation trade theme could arguably be seen, with the focus on stimulus weighing on the dollar throughout the day.
EUR/USD climbed to a one-month high, extending gains from 1.1840 to 1.1870 before easing slightly thereafter. GBP/USD pushed higher from 1.2980 to 1.3072 as the dollar slumped but also helped by the EU reaffirming its commitment to Brexit talks.
Meanwhile, USD/JPY fell from 105.30 to 104.82 despite the push higher in Treasury yields. That supports the argument that the movement so far today goes beyond the 'risk' narrative, though there might be some catch-up to be had for the pair later on.
Elsewhere, AUD/USD kept gains around 0.7075-90 for the most part while NZD/USD also traded around 0.6620-35 as both pairs are consolidating gains above their respective 100-hour moving averages since Asia Pacific trading today.
All eyes will turn towards Washington once again in the session ahead but as the market starts to come around to the idea of a stimulus package coming one way or another - before or after the election - that might not bode well for the dollar outlook as such.
And as long as the reflation trade narrative doesn't prompt a hasty jump in yields, equities may benefit from a controlled and gradual climb despite a possible shift from growth stocks to value stocks among investor portfolios.
But all this may very likely be a discussion and market theme for another day.
For now, any stimulus setback or negative headlines could still have the potential to reverse some of the sentiment we are seeing so far in trading today.
