The US Federal Reserve sanctioned a 0.5% emergency cut in interest rates to 1.25%.

The US Federal Reserve sanctioned a 0.5% emergency cut in interest rates to 1.25%.

US yields moved sharply lower with the 10-year bond at fresh record lows below 1.00%. Volatility remained a key feature across asset classes as coronavirus developments dominated.

The dollar dipped sharply as US yields declined but recovered from 8-week lows. EUR/USD failed to hold above 1.1200 amid expectations of a small ECB rate cut.

Sterling and the Canadian dollar were undermined by expectations of central bank rate cuts, but the Australian dollar was resilient.

The Euro-zone CPI inflation rate declined to 1.2% for February, below consensus forecasts of an unchanged rate of 1.4% while the core rate met market expectations of 1.2% from 1.1% previously. G7 finance ministers stated that they were closely monitoring the coronavirus spread and reaffirmed the commitment to use tools to guard against downside risks, but a lack of definitive action undermined sentiment. EUR/USD drifted lower into the New York open with a retreat to the 1.1100 area.

In an unscheduled announcement, the US Federal Reserve announced that it was cutting the Federal Funds rate by 0.50% to 1.25% with a unanimous vote. According to the statement, the coronavirus outbreak posed evolving risks to economic activity. Chair Powell stated that risks to the US outlook have changed materially and that the new risks will weigh on the economy for some time.

As US yields declined, the spread between US and German 10-year bonds narrowed to the lowest level since the third quarter of 2017. The dollar moved sharply lower following the announcement with the currency index at 8-week lows while EUR/USD briefly moved to 2-month highs above the 1.1200 level.

There was a correction before the European close, especially given increased speculation that the ECB would also cut interest rates at next week’s policy meeting.

The dollar was held in relatively narrow ranges ahead of the New York open with selling interest above 108.00 against the Japanese yen as equity futures drifted. Wall Street indices posted immediate gains following the Fed interest rate cut, but quickly moved into negative territory. There were further strong gains for Treasuries following the Fed move with the 10-year yield gaining by over a full point as the 10-year yield dipped sharply to fresh record lows below 1.00%.

In this environment, USD/JPY declined sharply and tested the 107.00 area as Wall Street equities moved sharply lower.

China’s Caixin PMI services index slumped to a record low of 26.5 for February from 51.8 previously and the composite index declined to 27.5 from 51.9. Gauges of new orders, exports and employment all declined to record lows, but order backlogs increased. In the US Super Tuesday Democrat Party primaries, Biden won the most number of states, but Sanders could win most delegates if he takes California. US equity futures rallied and Treasuries stabilised with USD/JPY recovering to near 107.50 from 4-month lows near 106.80 with volatility likely to remain a key short-term feature and jobs data later in the day.

The UK PMI construction index strengthened to a 14-month high of 52.6 for February from 48.4 in January which was above consensus forecasts of 49.9. New orders strengthened significantly on the month with a further improvement in the residential sector as an easing of political uncertainty boosted new contracts.

In testimony to the Treasury Select Committee, Bank of England Governor Carney stated that the bank’s role is to support the economy through an economic shock that could be large, but temporary. He stated that rates would need to rise if the bank’s January forecasts were met, but the overall focus was on potential support measures given the coronavirus impact on economic activity.

Markets remained convinced that rates would be cut at the March policy meeting and, following the Fed rate cut, future markets indicated a 100% chance of a cut this month.

Economic Calendar

Expected Previous
07:00 EUR German Retail Sales (M/M)(JAN) - -3.30%
07:00 EUR German Retail Sales (Y/Y)(JAN) - 0.80%
07:30 CHF CPI (M/M)(FEB) - -0.20%
07:30 CHF CPI (Y/Y)(FEB) - 0.20%
08:45 Markit/ADACI Svcs PMI(FEB) - 51.4
08:50 Markit Serv PMI(FEB) 52.6 51
08:55 EUR German PMI Composite(FEB) 51.1 51.2
08:55 EUR German PMI Services(FEB) 53.3 54.2
09:00 GDP Prelim QQ -0.30% 0.10%
09:00 GDP Prelim YY 0.30% 0.30%
09:00 Euro-Zone PMI Composite(FEB) - 51.3
09:30 GBP PMI Services(FEB) 52.4 53.3
10:00 Euro - Zone Retail Sales (Y/Y)(JAN) 2.40% 1.30%
10:00 Euro - Zone Retail Sales (M/M)(JAN) - -1.60%
12:00 USD MBA Mortgage Applications - 1.50%
14:45 USD Markit PMI Composite 49.6 53.3
15:00 USD ISM Non-Manufacturing PMI(FEB) 55.5 55.5
15:00 BOC Rate Statement - -
15:00 CAD BoC Rate Decision 1.75% 1.75%
15:30 USD Crude Oil Inventories - 0.452M
18:30 German Buba President Weidmann speech - -
22:00 FOMC Member J. Bullard Speaks - -

*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.