Risk appetite improved sharply on Tuesday amid hopes that the global impact of coronavirus outbreak could be contained.
Risk appetite improved sharply on Tuesday amid hopes that the global impact of coronavirus outbreak could be contained, although uncertainty remained very high.
The Japanese yen and Swiss franc lost ground as equities advanced. The dollar secured limited net gains amid expectations that the US economy would out-perform other major economies.
Commodity currencies rallied slightly as risk appetite improved, although weak oil prices hurt the Canadian dollar. Sterling recovered from initial losses to trade higher with support from a firm PMI data.
The Euro was unable to make any headway on Tuesday despite an increase in German bond yields. Overall yield spreads moved slightly against the single currency and there were concerns that the coronavirus would have a larger impact on the Euro-zone economy relative to the US due to the higher proportion of exports in final demand.
US factory orders increased 1.8% for December compared with market expectations of 1.2%. There was also a recovery in the New York business conditions index to 45.8 from 39.1 previously which bolstered confidence in the outlook.
Overall, EUR/USD drifted towards 1.1030 at the European close before settling around 1.1040 as the US currency secured net gains for the second successive day while commodity currencies struggled to make any significant headway.
The US ISM non-manufacturing index will be released on Wednesday following a notable recovery for the manufacturing index with the ADP jobs data also scheduled. A strong reading for both would underpin confidence in the outlook.
Treasuries drifted lower ahead of the New York open with a net increase in yields underpinning the dollar. A senior WHO official stated that the coronavirus was not a pandemic at this stage which helped underpin sentiment. The WHO also called on countries not to impose travel or trade restrictions on China.
Although the number of cases continued to increase, there were some reports that the number of cases could peak this month which boosted confidence that the economic impact could be contained. White House economic adviser Kudlow stated that there could be some component shortages due to coronavirus, but the impact on supply chains was likely to be minimal.
The Bank of Japan stated it was prepared to loosen monetary policy if necessary. Asian markets made headway on Wednesday and the Chinese yuan held close to the 7.00 level against the dollar, although there was still an important element of caution with USD/JPY around 109.40 as US futures edged lower.
Sterling came under renewed pressure in early Europe with a GBP/USD dip to 6-week lows just below 1.2950 as EUR/GBP pushed to 0.8530. The UK PMI construction index strengthened to an 8-month high of 48.4 for January from 44.4 the previous month and above expectations of 47.0. The new business component recovered to near unchanged as contraction in the residential and commercial sectors eased, but the civil engineering sector remained under pressure.
Business confidence strengthened to an 18-month high as political uncertainty eased, although there were still underlying labour shortages. Following the data, markets priced out the potential for Bank of England rate cuts this year.
Sterling had recovered ground into the data and pushed higher after the release. Stronger risk appetite was also a positive factor during the day as equities made strong gains. GBP/USD pushed to highs near 1.3050 while GBP/EUR held around 1.1800. The UK currency edged lower on Wednesday with GBP/USD trading just above 1.3000.
|08:10||ECB Luis De Guindos Speaks||-||-|
|08:45||Markit/ADACI Svcs PMI(JAN)||51||51.1|
|08:50||Markit Serv PMI(JAN)||52.4||51.7|
|08:55||EUR German PMI Services(JAN)||52||54.2|
|08:55||EUR German PMI Composite(JAN)||49.5||51.1|
|09:00||Euro-Zone PMI Composite(JAN)||-||50.9|
|09:00||Euro-Zone PMI Services(JAN)||52.4||52.2|
|09:30||GBP PMI Services(JAN)||49.1||52.9|
|10:00||Euro - Zone Retail Sales (M/M)(DEC, 2019)||0.60%||1.00%|
|10:00||Euro - Zone Retail Sales (Y/Y)(DEC, 2019)||1.30%||2.20%|
|12:15||European Central Bank President Lagarde Speaks||-||-|
|13:15||USD ADP Employment Change(JAN)||155K||202K|
|13:30||USD Trade Balance(DEC, 2019)||-44.60B||-43.10B|
|13:30||CAD Trade Balance(DEC, 2019)||-1.15B||-1.09B|
|14:45||USD Markit Services PMI(JAN)||-||53.2|
|14:45||USD Markit PMI Composite(JAN)||-||53.1|
|15:00||USD ISM Non-Manufacturing PMI(JAN)||55.1||55|
|17:15||Gov Council Member Wilkins Speaks||-||-|
|17:30||Gov Council Member Wilkins Speaks||-||-|
|21:10||FOMC Brainard Speaks||-||-|