Sterling recovered from intra-day lows, but GBP/USD was trapped below 1.3500 as risk conditions dominated.

Risk trends dominated on Monday with conditions deteriorating sharply until the European close as equity markets moved sharply lower. Sentiment was hurt by further concerns over monetary tightening and geo-political tensions.

Wall Street posted heavy intra-day losses of over 3% to 3-month lows. There was a sharp rally in late trading with the S&P 500 index posting a net gain at the close. US futures dipped again on Tuesday with Asian bourses posting net losses.

The dollar was mixed and failed to hold intra-day gains amid speculation that the Fed could dial back on hawkish rhetoric. Moves in EUR/USD were contained as it traded just above 1.1300. The yen and Swiss franc retreated from intra-day highs on Monday. Sterling recovered from intra-day lows, but GBP/USD was trapped below 1.3500 as risk conditions dominated. Higher than expected inflation data helped limit Australian dollar losses.

The German manufacturing PMI index strengthened to 60.5 for January from 57.4 previously with the services index in expansion territory at 52.2 from 48.7 and both figures above consensus forecasts. The Euro-zone manufacturing index also strengthened to 59.0 from 58.0 and above expectations, but the services-sector index was below expectations at 51.2 from 53.1 previously. There was further upward pressure on costs with services selling prices increasing at the fastest rate on record.

In its monthly report, the Bundesbank stated that inflation will remain exceptionally high in early 2022 while manufacturing remains constrained by supply disruptions.

ECB council member Villeroy stated that the central bank was ready to do whatever it takes to get inflation back below 2%. Markets expectations of an ECB rate hike were, however, pushed back again. The Euro was also hampered by underlying concerns over the Ukraine situation with EUR/USD dipping to lows below 1.1300.

The US manufacturing PMI index dipped to a 15-month low of 55.0 for January from 57.7 previously and below consensus forecasts of 56.7. The services index also declined sharply to an 18-month low of 50.9 from 57.6 previously and below market expectations of 55.0. There was an easing of order backlogs for the month.

Companies were hampered by a fresh surge in coronavirus cases supply-chain difficulties and staff shortages.

There was an easing of cost pressures within the manufacturing and services sector for the month with the data triggering some doubts over the US outlook.

The dollar was unable to sustain the advance and EUR/USD settled little changed around 1.1320 as trends in risk appetite dominated. There was further volatility across equity markets, although the Euro moves were relatively limited as EUR/USD settled just above 1.1300 with further choppy trading inevitable.

US Treasuries edged lower in early New York on Monday despite a further slide in US futures which provided an element of dollar support. There was still significant yen demand on defensive grounds given the overall slide in risk appetite and fresh drop in global equity markets. Overall, USD/JPY held close to around 113.85 with yen gains on the crosses.  There was a strong rally late in the Wall Street session which triggered a correction in the yen with USD/JPY edging towards the 114.00 level.

There was a significant element of caution ahead of Wednesday’s Federal Reserve policy decision with uncertainty whether the volatility in equities would have an impact on the Fed statement. There were still expectations that the bank would signal that a rate hike would be sanctioned in March.

US equity futures dipped again on Tuesday and their notable losses across most Asian bourses during the session as overall risk appetite remained fragile. A policy tightening by the Singapore central bank also sapped risk appetite with USD/JPY around 113.85 in early Europe and EUR/JPY around 128.70.

According to flash data, the UK PMI manufacturing index declined to an 11-month low of 56.9 for January from 57.9 in December.  The manufacturing output index, however, strengthened to a 5-month high while there was a slight easing of cost pressures.  The PMI services-sector index also retreated to an 11-month low of 53.3 from 53.6 and slightly below consensus forecasts. There was, however, a strong increase in orders growth for the month while there were strong inflationary pressures with input costs and selling prices both registering the second-highest readings on record which will maintain underlying speculation over Bank of England tightening.

The overall data impact was limited given expectations that an easing of coronavirus restrictions would lead to stronger conditions in the short term.

Sterling, however, continued to lose ground with the UK currency hurt by a fresh slide in risk appetite and sharp losses in equity markets.

Sterling rallied later in the session as risk appetite strengthened with a GBP/USD move to the 1.3485 area while GBP/EUR settled just above the 1.1900 level.

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