Risk appetite dipped again as growth fears dominated with a ban on travel for non-US citizens from the EU area further eroding confidence.

Overall risk appetite dipped again as growth fears dominated with a ban on travel for non-US citizens from the EU Schengen area further eroding confidence.

Global equity markets declined sharply with the US bull market officially ending. Markets priced in a 100% chance of at least 75 basis points of easing by the Federal Reserve next week.

The dollar was still able to advance against European currencies with EUR/USD close to 1.1300. Demand for defensive currencies increased with USD/JPY below 104.00.

Sterling registered net losses after the Bank of England rate cut and big fiscal spending package as global risk appetite deteriorated.

The Euro failed to sustain gains in choppy conditions ahead of Wednesday’s New York open. Chancellor Merkel’s warning over the risk of very substantial coronavirus cases within Germany undermined sentiment, especially with further bickering over a fiscal response. There were also reports that the US would impose additional travel restrictions on EU countries.

US consumer prices increased 0.1% for February, slightly below consensus forecasts of 0.2% with the year-on-year rate at 2.3% from 2.5%. Core prices increased 0.2%, with an annual increase slightly above market expectations at 2.4% from 2.3%.

The dollar regained ground during New York trading with EUR/USD losses steepening to near 1.1250 after a break below 1.1300.

After the US close, President Trump announced that it would ban travel from much of Europe for 30 days. The ban will apply to anyone who has been in the Schengen area within the past 14 days. Although there will be damage to the Euro-zone, risk appetite also deteriorated and EUR/USD secured a recovery to near 1.1300 as markets expected at least a 0.75% Fed rate cut.

Markets are expecting a small ECB rate cut at Thursday’s policy meeting and the potential for more favourable lending packages for banks. Bank President Lagarde is likely to emphasise the need for an urgent fiscal response and her press conference overall will be important for market sentiment with further choppy trading inevitable.

According to sources, the Bank of Japan is likely to ease monetary policy next week to prevent market volatility from affecting business sentiment with increased ETF buying the most likely outcome, although there was no consensus as yet.

USD/JPY pushed to highs around 105.35 following the reports, but failed to sustain the gains as equity markets remained in negative territory. The World Health Organisation (WHO) declared that the coronavirus did represent a pandemic which reinforced risk aversion. Wall Street indices continued to lose ground in New York and USD/JPY dipped below 105.00.

President Trump’s announcement of a travel ban increased fears over the global impact and a lack of detail on domestic supportive measures triggered a further downturn in risk appetite with equity markets registering sharp losses as the Nikkei 225 index declined 4.5%. Japan’s Finance Ministry again warned over currency-market moves and the Bank of Japan stated that it was ready to respond further, but USD/JPY dipped to near 103.0 before a recovery to 103.60.

As well as the cut in interest rates to a record-equalling low of 0.25%, the Bank of England announced a new lending facility which would boost potential lending to businesses and ensure that lower interest rates are passed on to customers.

UK data was weaker than expected with GDP unchanged for January compared with market expectations of a 0.2% increase. The year-on-year increase also declined to 0.6% an upwardly revised 1.2% previously with weak industrial data.

Chancellor Sunak announced a £30bn stimulus package for 2020 with additional funding for the NHS and a substantial business support package. He also announced a £175bn increase in spending over the next five years. Budget deficit forecasts were revised up sharply, although Sunak claimed that the government’s fiscal rules would not be broken.

There was speculation that the next round of EU/UK trade talks could be cancelled, but the US travel ban does not apply to the UK. RICS housing data strengthened to the highest level for close to 4 years, but risk conditions dominated with another government COBRA meeting on Thursday.

Economic Calendar

Expected Previous
10:00 Euro-Zone Industrial Production (Y/Y)(JAN) -3.60% -4.10%
10:00 Euro-Zone Industrial Production (M/M)(JAN) 1.10% -2.10%
12:30 USD PPI Ex Food & Energy (Y/Y)(FEB) 1.30% 1.70%
12:30 USD PPI Ex Food & Energy (M/M)(FEB) 0.20% 0.50%
12:30 USD PPI (M/M)(FEB) - 0.50%
12:30 USD PPI (Y/Y)(FEB) 1.60% 2.10%
12:45 Deposit Facility Rate -0.5 -0.5
21:30 NZD Business NZ PMI(FEB) - 49.6

*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.