Sterling lost ground amid underlying unease over UK/EU trade tensions.

Narrow ranges prevailed on Monday with the US market holiday stifling activity. The dollar held a firm tone and close to 4-month high with EUR/USD trapped at 34-month lows below 1.0850.

Risk appetite was more fragile on Tuesday with increased unease over the coronavirus economic impact after Apple’s warning and evidence of weak Chinese production. After European record highs on Monday, global equities registered net losses on Tuesday, although the Chinese market was resilient.

Sterling lost ground amid underlying unease over UK/EU trade tensions.

In its monthly report, the German Bundesbank stated that the coronavirus outbreak threatened to disrupt global supply chains and pose a cyclical downside risk to the economy with exporters likely to suffer from a decline in overall Chinese demand. Overall, however, it saw no fundamental change in the German economy for the first quarter of 2020.

Confidence in the Euro-zone outlook remained fragile with markets concerned that the coronavirus outbreak would have a larger than expected economic impact on China with important knock-on effects for the Euro-zone.

Markets were considering the implications of Hedge funds increasing their short Euro positions at the same time as asset managers increased their net long position with net volatility liable to increase on position adjustment.

Narrow ranges prevailed with a lack of trading volumes given the US market holiday. The dollar held a firm tone with commodity currencies able to secure only a marginal recovery while the Euro remained firmly on the defensive as EUR/USD held very close to 34-month lows around 1.0830.

The latest ZEW investor confidence data for German and the Euro-zone will be released on Tuesday with market expectations for a significant retreat after last month’s sharp gains. The Euro was unable to secure any recovery in early Europe as the dollar maintained a strong tone and commodity currencies edged lower.

There was no major change in US Treasury futures in Europe with the 10-year yield just below 1.60%. Activity was inevitably stifled by the US market holiday with no lead from Wall Street due to the US holiday.

Markets remained uneasy over the coronavirus outbreak with Chinese sources reporting that the chief medical officer expected a peak during the second half of February in Southern China and a nationwide peak sometime in April. Overall tight ranges prevailed with the dollar holding steady and USD/JPY trading just below the important 110.00 level.

Confidence was more fragile in Asian trading on Tuesday even though the new number of coronavirus cases in Hubei declined. There were increased concerns over the economic impact following reports of major logistics difficulties. Apple also cut its earnings guidance due to the coronavirus outbreak with production recovering more slowly than expected. Chinese demand was weaker and another survey reported that staff shortages were a key difficulty for US companies in China. Equity markets declined and underlying trade fears were significant and USD/JPY retreated to 109.75, although selling was limited.

During Monday, Sterling continued to gain an element of support from expectations that the UK budget would sanction a big increase in government spending, although markets were still waiting for definitive news whether the Chancellor’s statement would be delayed from the scheduled date of March 11th which created a significant element of uncertainty.

In his speech, Frost stated that the UK must have the ability to set laws that suit the UK given that this was a fundamental point of Brexit and he also insisted that there would be no extension to the transition period.

There are important UK data releases this week with the latest labour-market data due for release on Tuesday. Sterling failed to make any headway in early Europe with GBP/USD trading below 1.3000 with a more fragile global risk tone also limiting support.

Economic Calendar

Expected Previous
09:30 GBP Average Earning Including Bonus(DEC, 2019) 3.10% 3.20%
09:30 GBP Claimant Count Change(M/M)(JAN) 22.6K 14.9K
09:30 GBP Unemployment Rate(DEC, 2019) 3.80% 3.80%
10:00 German ZEW Survey (Current Situation) (FEB) -13.5 -9.5
10:00 German ZEW Survey (Economic Sentiment)(M/M)(FEB) 15 26.7
10:00 EUR Euro-Zone ZEW Survey (Economic Sentiment)(FEB) - 25.6
13:30 NY Empire State Manufacturing Index(FEB) 3.55 4.8
13:30 CAD Manufacturing Shipments (M/M)(DEC, 2019) -0.20% -0.60%
15:00 NAHB Housing Market Index(FEB) 75 75
19:00 FOMC Member Kashkari Speaks - -
21:00 USD TIC Net Long-Term(DEC, 2019) - 22.9B
23:50 JPY Machinery Orders (Y/Y)(DEC, 2019) -5.40% 5.30%
23:50 JPY Exports (Y/Y)(JAN) - -6.3
23:50 JPY Merchandise Trade Balance Total(JAN) -150.0B -154.6B

*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.