Risk appetite stabilised on Monday as aggressive Chinese central bank liquidity injections underpinned sentiment.

Risk appetite stabilised on Monday as aggressive Chinese central bank liquidity injections underpinned sentiment, but coronavirus fears persisted.

Global equities made net headway and demand for defensive assets faded slightly with limited losses for the Japanese yen and Swiss franc. The dollar was boosted by a stronger than expected ISM manufacturing data with EUR/USD losing ground.

Commodity currencies remained on the defensive with USD/CAD at 2-month highs. The Australian dollar gained slight relief as the Reserve Bank held interest rates at 0.75%. Sterling declined sharply as a correction of Friday’s gains was compounded by trade worries.

The final US PMI manufacturing reading was revised slightly higher to 51.9 from the flash reading of 51.7, although this was the lowest reading for three months as exports declined. The ISM manufacturing index strengthened to 50.9 for January from a revised 47.8 the previous month. This reading was above consensus forecasts of 48.5 and the strongest reading for six months. New orders and production also moved into expansion territory for the month with a recovery in export orders. Unfilled orders and employment continued to decline, however, even though the rate of contraction was slower.

Treasuries were little changed ahead of the New York open while equity futures held tentative overnight gains and USD/JPY held close to the 108.50 level. Treasures dipped after the ISM release and USD/JPY briefly moved to highs at 108.80. There were still significant underlying trade tensions with reports that the US Administration would deny more tariff exemption requests from China. Coronavirus fears increased again following reports that the number of US cases had increased and the dollar was unable to gain further traction, although USD/JPY was able to find support above 108.50 and settled around 108.65.

The final UK PMI manufacturing index was revised up slightly to 50.0 from the flash reading of 49.8 and confirmed as a 9-month high. Domestic orders increased on the month, but there was a third successive decline in export orders. Business confidence strengthened to an 8-month high while inventories declined sharply.

Sterling was unable to secure fresh support from the data and continued to lose ground during the European session. Prime Minister Johnson and EU’s Barnier both outlined their positions on a potential UK/EU trade agreement with Barnier emphasising the need for a level playing field while Johnson rejected the need to follow EU rules. Fears over tough negotiations and potential failure to reach agreement triggered fresh selling pressure on Sterling.

GBP/USD dipped to test the 1.3000 area while GBP/EUR broke below the 1.1750 level. Sterling secured only a marginal recovery on Tuesday despite firmer global risk conditions and dipped again in early Europe ahead of the PMI construction data.

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