Risk appetite was more fragile on Tuesday due to concerns over the coronavirus economic impact and supply-chain issues.

Risk appetite was more fragile on Tuesday due to concerns over the coronavirus economic impact and supply-chain issues.

Sentiment shifted again on Wednesday on hopes for further China support measures. In this context, equity markets regained ground after the New York close in choppy trading.

The Euro weakened further after a weaker than expected German economic confidence index and EUR/USD dipped to 34-month lows below 1.0800. Sterling strengthened as the UK budget was confirmed for March 11th, but gains faded.

The German ZEW economic sentiment index declined to 8.7 for February from 26.7 the previous month and below consensus forecasts of 21.5. There was also a retreat in the current conditions component to -15.7 from -9.5 for January while the Euro-zone expectations index dipped to 10.4 from 25.6. The Euro dipped lower in an immediate reaction with EUR/USD moving to below 1.0820 as confidence in the Euro-zone outlook remained very weak.

Reports that EU Finance Ministers, including Germany’s Scholz, had recommended a fiscal boost provided only brief Euro relief support.  EUR/USD dipped to fresh 34-month lows just below 1.0800 at the New York open.

The US New York Empire manufacturing index strengthened to 12.9 for February from 4.8 previously and above consensus forecasts of 5.2. There was a strong improvement in new orders and unfilled orders also increased on the month. There were slightly weaker readings for employment while confidence in the outlook also dipped slightly, but the data provided net relief.

The yen continued to attract defensive support at the European open as equity markets moved sharply lower. Dollar losses were, however, limited with the yen hampered by fears that the Japanese economy would be damaged by the coronavirus outbreak. Equity markets attempted to stabilise ahead of the New York open with Chinese President Xi stating that it was still possible to meet 2020 economic targets despite the coronavirus.

Japanese exports declined 2.6% in the year to January, although this was better than the 7.0% expected drop while machinery orders declined sharply for December. Risk sentiment remained volatile with a more optimistic stance in Asia on Wednesday as China reported a decline in new coronavirus cases and there were expectations of further monetary stimulus measures.

USD/JPY edged above 110.00, but there was still an important degree of caution given uncertainties over the wider coronavirus economic impact and fears over sustained damage through disruption to global supply chains.

The UK unemployment rate held at 3.8% in the three months to December which was in line with expectations, but there was a smaller than expected increase in the jobless claimant count and employment increased 180,000 in the quarter to a fresh record high. Headline average earnings growth slowed to 2.9% from 3.2% previously with underlying earnings at 3.2%. Real earnings increased to the highest level for 11 years which helped underpin confidence in the outlook with markets considering the data was strong enough to curb any near-term Bank of England interest rate cut.

The UK government confirmed that the Budget will be presented on March 11th with Chancellor Sunak stating that the government would deliver promises to the UK people. This report helped underpin sentiment amid expectations of sharp spending increases.

Sterling moved significantly higher with a GBP/USD move back above 1.3000 while GBP/EUR rallied towards 1.2070. There was selling interest at higher levels with GBP/USD drifting to trade just below 1.3000 on Wednesday ahead of the latest UK inflation data.

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