Fear dominated for much of Friday before late relief as Fed Chair Powell expressed willingness to support the economy.

Fear dominated for much of Friday before late relief as Fed Chair Powell expressed willingness to support the economy.

Expectations of global central bank support also helped ease immediate fears triggered by dismal Chinese PMI data with high volatility a key feature.

A further slide in US 10-year yields to record lows and expectations of Fed rate cuts undermined the dollar. USD/JPY dipped to 4-month lows below 107.50 before a recovery while EUR/USD traded above 1.1000. Sterling lost ground on Friday with month-end selling an important feature.

Friday’s German data releases had little overall impact with coronavirus and degrees of risk aversion continuing to dominate. Euro-zone equity markets continued to decline sharply and German yields declined to fresh 4-month lows. EUR/USD pushed to highs near 1.1050 before retreating again ahead of the New York open as overall volatility increased.

The US Chicago PMI index recovered to 49.0 for February from 42.9 as production increased to an 8-month high. Orders remained in contraction, however, and employment also declined. The important national ISM data is due on Monday.

The dollar recovered briefly during the New York session with EUR/USD dipping to near 1.0950, but there was a fresh reversal later in the day as the US currency came under fresh selling pressure from interest rate expectations.

St Louis Fed President Bullard stated that it was too early to make a judgement, but that the Fed would be willing to act if there was a major US hit.

Chair Powell also stated that the coronavirus poses evolving risks and that the Fed will use its tools and act as appropriate to support the economy. Futures markets priced in a 95% chance that the Fed would cut interest rates by 0.50% at the March policy meeting. Powell’s comments triggered further US selling with EUR/USD back near 1.1050 as US yields dropped.

Risk appetite dominated during Friday with volatility spiking higher and there were sharp losses across all major bourses. USD/JPY attempted to stabilise near 108.50, but a further slide in Wall Street equities and fresh all-time lows in the 10-year bond yield at below 1.15% triggered lows near 107.50 before a tentative recovery as equities recovered from intra-day lows.

Chinese PMI data releases over the weekend were shocking with the manufacturing index declining to 35.7 from 50.0 previously while the non-manufacturing index slumped to 29.6 from 54.1 in January. Both figures were at record lows as activity was hammered by the coronavirus closures.

The dollar opened sharply lower in Asia with 4-month USD/JPY lows around 107.30. China’s Caixin PMI manufacturing index declined to a record low of 40.3 from 51.1 previously with heavy damage in supply and demand. Business confidence strengthened, however, amid expectations that conditions would improve.

Expectations of global central bank support measures and Bank of Japan liquidity injections were also important in underpinning risk conditions. Equity markets rallied and USD/JPY recovered to above 108.00 as volatility remained intense.

Bank of England Governor Carney warned that the coronavirus impact would have a negative impact on the economy, although it was too early to judge the impact. The comments were no surprise, but tended to limit Sterling support.

Weaker global risk appetite also had an important negative impact on the currency as confidence in the economic outlook continued to weaken. Given the open UK economy and current account deficit vulnerabilities, the UK currency lost ground.

Economic Calendar