Sterling dipped after the Bank of England cut interest rates to 0.25% from 0.75%.

Overall risk appetite strengthened on Tuesday amid hopes for US fiscal stimulus, but confidence remained fragile and concerns increased once again on Wednesday.

Coronavirus cases continued to increase outside China with US and Italian developments dominating and high volatility across all asset classes.

Fed Funds futures shifted again on Wednesday indicating a 90% chance of 75 basis points of easing next week. The dollar regained ground strongly as US equities outperformed before fading again with EUR/USD securing slight net gains as US yields declined.

The yen and Swiss franc regained some ground, as USD/JPY failed to hold above 105.00. Sterling dipped after the Bank of England cut interest rates to 0.25% from 0.75%.

Euro-zone GDP was confirmed at 0.1% for the fourth quarter of 2019 with a marginal revision in the year-on-year rate to 1.0% from 0.9%. Markets remained very uneasy over the Italian situation as a national lock-down came into operation. Domestic activity will inevitably be hit hard and there will also be fears over a wider Euro-zone impact on trade disruption. German Chancellor Merkel also appeared to reject an immediate fiscal stimulus which undermined Euro sentiment.

Markets continued to price-in an interest rate cut at Thursday’s ECB meeting, but the bank has little room for manoeuvre.

The US NFIB small-business index increased slightly to 104.5 for February from 104.3 previously and significantly above consensus forecasts with no evidence within the data that the coronavirus outbreak had a significant impact.

The dollar was able to recover some ground during Tuesday as US yields moved higher while commodity currencies lost ground. There was a shift in futures markets in Europe with the chances of a 0.75% rate reduction on March 18th declining to below 50% which helped support the dollar, although volatility remained high across all asset classes.

Global equity markets maintained a firm tone ahead of Tuesday’s New York open and, with US yields moving higher, the dollar was able to move higher. Expectations of US fiscal support measures were significant in underpinning dollar sentiment with reports that payroll taxes could be suspended for 90 days. As bond yields continued to move higher, USD/JPY moved back above 105.00 after the European close with a peak around 105.30 as the S&P 500 index gained close to 5.0%.

Volatility remained high with confidence dipping again in Asia on Wednesday as there were no definitive stimulus plans from the US Administration which maintained uncertainty. Biden secured victory in the latest round of Democrat primaries.

Domestically, Japan recorded an increase in coronavirus cases which undermined sentiment and equities retreated once again. Japan’s Ministry of Finance warned over market volatility and that rapid yen swings, whether up or down, were undesirable. As US yields declined, USD/JPY retreated to the 104.30 area before a recovery with markets braced for further high volatility.

Sterling was unable to make headway on Tuesday and gradually lost traction as previous position adjustment and the weaker US dollar ran its course. Underlying concerns over the global economy was a significant negative factor given the UK exposure to international trade volumes and under-performance in UK equities also curbed Sterling support. GBP/USD dipped to lows below 1.2900 with the EUR/GBP advancing to the 0.8780 area in choppy trading.

Chancellor Sunak will announce the latest UK budget on Wednesday and Sterling gained some support after government claims that overall infrastructure spending would be increased to £600bn over 5 years, but gains faded again as sentiment towards the overall economic outlook remained negative.

Sterling initially rallied on Wednesday, but gains reversed after the Bank of England cut interest rates in an unscheduled move to match the record low of 0.25% from 0.75%. The bank will also introduce a new funding scheme for small businesses and ease capital requirements.

Economic Calendar

Expected Previous
09:30 GBP Industrial Production (M/M)(JAN) - 0.10%
09:30 GBP Industrial Production (Y/Y)(JAN) -0.80% -1.80%
09:30 GBP Manufacturing Production (Y/Y)(JAN) -1.00% -2.50%
09:30 GBP Manufacturing Production (M/M)(JAN) 0.50% 0.30%
09:30 GBP Trade Balance(JAN) -10.00B 0.85B
09:30 GBP Trade Balance Non EU(JAN) - 6.72B
11:00 USD MBA Mortgage Applications - 15.10%
12:30 USD CPI Ex Food & Energy (Y/Y)(FEB) 2.30% 2.30%
12:30 USD CPI Ex Food & Energy (M/M)(FEB) 0.20% 0.20%
12:30 USD CPI (Y/Y)(FEB) 2.30% 2.50%
12:30 USD CPI (M/M)(FEB) 0.20% 0.10%
18:00 Monthly Budget Statement(FEB) -11.5B -33.0B
23:50 JPY BSI Large Manufacturing (Q/Q) - -7.8

*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.