Risk appetite rallied only briefly on Tuesday before dipping sharply again amid fears over a global coronavirus outbreak and substantial economic disruption.

Risk appetite rallied only briefly on Tuesday before dipping sharply again amid fears over a global coronavirus outbreak and substantial economic disruption.

Further speculation over US interest rate cuts undermined the dollar with EUR/USD edging higher. USD/JPY did find support close to 110.00. Sterling was underpinned by a dovish shift in interest rates elsewhere and GBP/USD tested 1.3000.

The Australian dollar dipped to fresh 10-year lows as commodities remained under pressure.

After opening higher, German equities quickly lost ground again on Tuesday as risk appetite weakened further. The German 10-year bond yield declined to 4-month lows just below -0.50%, although there was little overall change in yield spreads.

US consumer confidence was little changed at 130.7 for February from a revised 130.4 the previous month, although this was below consensus forecasts. A significant decline in the current conditions index was offset by a stronger reading for expectations. Within the data, confidence in the labour market was slightly weaker for the month.

The Richmond Fed manufacturing index declined sharply to -2 for February from 20 previously with new orders also reverting to negative territory. Employment indices were mixed as skills shortages continued while prices paid increased more sharply.

In contrast, the Philadelphia Fed non-manufacturing index strengthened to 36.1 for February from 23.5 previously with a stronger reading for new orders. This followed a strong reading for the manufacturing index last week.

Fed Funds futures indicated an 85% chance of an interest rate cut by the end of July with a 50% chance of two cuts. Dallas Fed President Kaplan stated that he was not considering a rate cut at this time while Fed vice-chair Clarida stated that the central bank is closely monitoring the situation. Expectations of lower interest rates, however, continued to unsettle the dollar and EUR/USD recovered from intra-day losses to move to highs around 1.0890 before consolidation around 1.0875 on Wednesday.

After initially finding some relief on Tuesday, global equity markets quickly lost traction once again with US futures losing gains. Risk appetite deteriorated amid fresh fears over a coronavirus pandemic as global cases continued to increase.

After a brief recovery into the New York open, selling pressure resumed as fear increased once again. A CDC official stated that it was no longer a question of if a coronavirus pandemic will happen, but when. Overall, there were increased concerns that the US economy would be affected which also directly dampened dollar support.

There was further buying in US Treasuries with the 10-year yield close to record lows which triggered a fresh round of selling. The yen gained an element of defensive support and USD/JPY dipped to test the 110.00 level late in the European session.

The UK CBI retail sales index was little changed at 1 for February and sales are expected to decline slightly in March. The orders component was also weak for February, but there was a sharp recovery in investment intentions for the month. A net balance of 26% planned increased investment compared with -38% the previous month, the strongest figure since 2010 and sharpest monthly improvement on record. Stronger investment intentions provided an element of Sterling support.

EU Ministers approved the EU mandate for trade talks with the UK and there was some relief that the stance was slightly less confrontational than feared. Nevertheless, there will still be very tough negotiations ahead with talks due to start on Monday.

Economic Calendar

07:45Consumer Confidence(FEB)103104
09:00CHF ZEW Expectations(FEB)-8.3
09:30GBP BBA Mortgage Approvals-46.8K
12:00USD MBA Mortgage Applications--6.40%
15:00USD New Home Sales(JAN)708M694M
15:00USD New Home Sales Change(JAN)1.50%-0.40%
21:45NZD Trade Balance (M/M)(JAN)-547M
21:45NZD Trade Balance (Y/Y)(JAN)--4.310M

*All rates shown are indicative of interbank rates and should only be used for indication purposes only. It is important to note that foreign exchange rates fluctuate and that rates may vary depending on the amount and the base currency that is purchased or sold. Rates are correct as of 8:00am UK time. CentralFX are not responsible for the rates shown.