Volatility remained a key feature during Monday as markets speculated over government and central bank responses to the coronavirus outbreak.

Volatility remained a key feature during Monday as markets speculated over government and central bank responses to the coronavirus outbreak.

The dollar was again undermined by the rate-cut speculation with the currency index dipping to 6-week lows before a recovery. EUR/USD posted strong gains to 4-week highs around 1.1180 before correcting.

The Australian dollar was resilient despite a Reserve Bank interest rate cut. Sterling continued to lose ground despite gains in equity markets.

The Euro-zone PMI manufacturing index was revised marginally to 49.2 in the final reading from the flash reading of 49.1 and confirmed at a 12-month high. The German index advanced to a 13-month high, but the Italian index retreated to a 2-month low. The data was a small net positive for the Euro, although wider global conditions dominated. Dollar confidence remained weak on expectations of rate cuts and the Euro gained an element of support from short covering. Markets also assumed that the ECB had very little scope to lower interest rates further, increasing pressure for a substantial fiscal stimulus.

The US PMI manufacturing index was revised marginally lower to 50.7 from 50.8 previously. The ISM manufacturing index declined to 50.1 from 50.9 the previous month and below consensus forecasts of 50.5. New orders edged into contraction territory and employment continued to decline.

Inventories declined on the month and delivery times lengthened to supply-chain issues. The data was relatively close to market expectations, but did not dispel expectations that the Federal Reserve would cut interest rates by 0.50% by the March 18th policy meeting and possibly announce an emergency cut this week.

The dollar continued to lose support on expectations of much lower yields with EUR/USD advancing strongly to 6-week highs just above 1.1180. The ECB stated that it was monitoring the situation closely and would respond as appropriate. The dollar index recovered slightly from 6-week lows with the EUR/USD just below 1.1150 on Tuesday.

USD/JPY advanced to the 108.50 area ahead of the New York open, but failed to hold the gains and dipped towards 107.50 in early New York as equities lost ground. Risk appetite strengthened again in New York amid hopes that global central banks would loosen policy aggressively in an attempt to boost demand as volatility remained a key element.

The dollar, however, was unable to draw support lower yields and expectations of Fed rate cuts undermined wider US currency support. In this environment, USD/JPY only advanced to the 108.30 area despite S&P 500 gains of over 4.5% at the US close. Although Treasuries lost ground, overall 10-year yields undermined potential dollar support.

G7 finance ministers will hold a conference call ahead of Tuesday’s New York open and the latest reports suggested that there would be no immediate dramatic moves to cut interest rates. This triggered a fresh reversal in sentiment as US equity futures moved lower. The dollar overall remain on the defensive and USD/JPY retreated to the 107.70 area before a correction.

The final UK PMI manufacturing index was revised down slightly to 51.7 from a flash reading of 51.9, although this was confirmed at a 16-month high. Orders increased for the second successive month while delivery times increased sharply. Mortgage approvals increased to a 4-year high for January, maintaining evidence of firm domestic demand.

Sterling was unable to make headway as fears over the global growth outlook continued to sap support, especially in view of the substantial UK current account deficit which exposes the currency to potential selling when risk sentiment is weak.

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