The euro sold-off sharply on Wednesday, down over half a percent at one stage, as investors began to panic about the impact of new lockdowns on the global economy.

France and Germany both announced national lockdowns yesterday, as new virus cases continue to surge across almost all of the European continent. The new measures in France will last until the end of November at the very least and include the closure of all non-essential businesses and orders to remain at home unless for essential reasons. Germany’s one-month ‘lockdown light’ will begin on 2nd November and will be less severe than that announced in France, although all restaurants, gyms and theatres will be forced to close.

With fresh measures being announced on an almost daily basis in the common bloc, it is now not a question of if the economic recovery will slow in Q4, but to what extent and whether a ‘double dip’ recession can be avoided. Regardless, there is a general consensus that fresh stimulus will be required from the European Central Bank in order to stave off such risks. As we mentioned in our ECB October meeting preview report, we think that the bank will use today’s meeting as an opportunity to lay the groundwork for an increase in its PEPP at the December meeting, when it will likely also revise lower its GDP and inflation forecasts.

Any indication from the ECB today that it is eyeing up an increase in stimulus measures in December would likely drive the euro even lower this afternoon. A non-committal, wait-and-see stance that plays down the need for imminent action would, by contrast, likely support the common currency. Regardless, we think that President Lagarde will strike a dovish tone that talks up the elevated risks posed by the virus and that policy will need to remain accommodative for the foreseeable future.

Will today’s US GDP data shift the dollar?

This afternoon will also see the release of the third quarter GDP number out of the US. A record high rebound in activity is expected following the collapse witnessed in Q2, with economists’ pencilling in a 31% annualised expansion. It will be interesting to see whether we see much of a reaction in the dollar to either a positive or negative surprise, given the data runs on a bit of a lag and considering the rapidly evolving pandemic situation. New virus cases have begun to increase again in the US, rising to a fresh all-time high on Wednesday according to worldometers. While the US government has largely overlooked this thus far, there is a risk that it could follow suit with its European counterparts should rates of infection continue to trend higher.

Amid everything else going on in the markets, the US election has gone slightly under the radar in the past couple of days, although we expect that to change once today’s ECB meeting is out of the way. You can listen to our latest episode of our FX Talk podcast here, where we discuss our final thoughts ahead of next Tuesday’s vote and its potential impact on the currency market.

Pound recovers losses as Brexit talks said to be progressing

Elsewhere in the markets, sterling clawed back ground against the US dollar, erasing around half of its losses from early-morning London trading. A report from Bloomberg yesterday that Brexit negotiations were making progress and that a deal was not too far off provided some support for the pound on Wednesday. Until a deal is done we do, however, think that short-term risks remain slightly tilted to the downside, given the still genuine possibility of a ‘no deal’ and the heightened pressure on Boris Johnson to announce new lockdown restrictions.

The UK government has reportedly been warned by its advisors that the second wave could be much deadlier than the first and that another prolonged lockdown until March could be required under a worst-case scenario. So far, ministers have defended the regional approach to dealing with the pandemic. If this were to change, we would undoubtedly see a bit of weakness in sterling in the near-term.