ISM manufacturing index dipped further into contraction with a 10-year low..

Confidence in the US economy dipped sharply after the ISM manufacturing index dipped further into contraction with a 10-year low.

US Treasuries rallied strongly after the data while equity markets declined sharply as US and global growth fears intensified.

After posting fresh 29-month highs, the dollar retreated to post net daily losses as EUR/USD recovered back above 1.0900.

The yen and Swiss franc also rallied after the US data as risk appetite faded. Sterling recovered ground after fresh reports of potential compromise over the Northern Ireland backstop, but gains faded quickly amid a lack of confidence.

The Australian dollar rallied from 11-year lows with net gains for commodity currencies. Oil prices were hurt by demand fears before a rally after an unexpected API inventory draw. Precious metals recovered some ground as the dollar dipped following the weak US data.

The dollar dipped sharply lower after the data with EUR/USD recovering to the 1.0930 area as yield spreads moved in the Euro’s favour. Volatility eased on Wednesday with the Euro unable to extend the recovery despite fragile dollar sentiment.

The UK PMI manufacturing index strengthened to a 4-month high of 48.3 for September from 47.4 previously, although this was the fifth successive reading into contraction territory. Orders and production continued to decline with notable weakness in investment while the pace of job losses accelerated. Business confidence improved only slightly while there was fresh inventory building due to Brexit uncertainty. Sterling recovered briefly but selling quickly resumed amid underlying concerns over the political backdrop. EUR/GBP moved to highs near 0.8940 with a GBP/USD slide to 3-week lows near 1.2200.

After the European close, there were reports that the EU was considering making concessions on the Northern Ireland backstop. Sterling moved sharply higher, while GBP/EUR dipped just below 1.1200, but gains faded as these reports were denied with GBP/USD consolidating around 1.2300.

The government is set to release its Brexit proposals on Wednesday with initial suggestions that the Northern Ireland plans would not be supported by the EU. Further choppy trading is likely during Wednesday with GBP/USD retreating further below 1.2300 at the European open.

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