FX Daily: Last chance for US stimulus hopes

After a rather soft start to the week for risk assets, investors are turning once again to the possibility of fresh US fiscal stimulus to revamp global risk appetite. Pelosi and Mnuchin appear to be inching closer to a possible agreement on the new fiscal stimulus bill and Pelosi is expected to provide more clarity on the real probabilities of a pre-election bill by the end of today, which represents an informal deadline to reach an agreement. Markets remain reasonably sceptical - even if a bipartisan deal is agreed, it is still expected to face the resistance of many Republican policymakers (who don’t view such a large package favourably), and this is despite President Trump’s pledge to put pressure on fellow party members to get on board with a potential deal. All in all, a fresh stimulus bill before the elections remains far from certain and we suspect there is not much of it currently being priced in by the markets, which should keep the downside for risk assets relatively limited if prospects of a bipartisan-deal eventually collapse. This should be the main driver for global markets today as the data calendar looks rather quiet and two Federal Reserve speakers (Williams and Evans) should not deviate from recent FOMC rhetoric.

EUR/USD started the week well and was helped yesterday by the suggestions from European Central Bank President Christine Lagarde to make the EU Recovery Fund a permanent tool. Still, a break above 1.1800 in the pair will likely depend on external factors, given the lack of clear EUR-specific catalysts today.

UK chief negotiator David Frost delivered some quite pessimistic remarks yesterday as he claimed there was no ground to resume trade negotiations with the EU. At the same time, Prime Minister Boris Johnson and some EU officials said the discussion was constructive and talks are largely expected to re-intensify this week. Markets are now used to such contradictory newsflow on Brexit and should maintain a rather cautious approach before fully buying into any incoming news. Sterling may therefore trade in a relatively tight range for now.

The minutes of the Reserve Bank of Australia's October meeting released overnight added more fuel to the ongoing dovish repricing of rate expectations. The minutes highlighted the openness of policymakers to cutting rates to zero (although not to negative for now) and buying longer-dated bonds, and remarked that the focus should be on actual rather than forecast inflation. In a separate speech, Assistant Governor Christopher Kent said it would not be unexpected to see rates drop below zero. With markets now cementing their expectations for more RBA stimulus to be deployed at the November meeting, AUD may struggle to recover ground just yet.