Sterling retreated as rate-cut speculation curbed support but did recover from intra-day lows.

Risk appetite recovered during Tuesday with hopes that coronavirus containment efforts would have some success, although caution remained high amid threats to air travel.

US economic data was mixed with a solid tone. The dollar made net headway but pulled back from 9-week highs as EUR/USD found support at 1.1000.

Sterling retreated as rate-cut speculation curbed support but did recover from intra-day lows. Scandinavian currencies recovered some ground.

Headline US durable goods orders increased 2.4% for December following a revised 3.1% decline the previous month. Underlying orders, however, declined 0.1% for the month compared with consensus forecasts of a 0.2% increase and capital spending was subdued on the month. Consumer confidence strengthened to 131.6 for January from a revised 128.2 in December with an increase in both the current conditions and expectations components. Consumers were also more optimistic over the labour market in the survey, although confidence in income prospects declined slightly.

Elsewhere, the Richmond Fed manufacturing index strengthened to 20 for January from -5 previously with new and unfilled orders returning to positive territory. Employment indices remained strong, but pricing pressures declined during the month.

There are very strong expectations that the Federal Reserve will leave interest rates at 1.75% at Wednesday’s policy meeting with the statement and forward guidance watched closely. There is speculation that a more optimistic tone in the statement could be offset by references to the coronavirus. EUR/USD traded around 1.1010 in early Europe as the dollar held steady.

The dollar recovered against yen to above 109.00 and pushed to highs around 109.20 after a solid reading for consumer confidence. The Bank of Japan summary of January’s policy meeting stated that there would be co-ordination with the government’s fiscal policy which could dampen the potential for further easing. US equity futures edged higher and the offshore yuan made slight gains, but Hong Kong stocks dipped sharply as the market re-opened after new-year holiday.

The yen resisted further selling as the reported coronavirus death toll increased to over 130 with the dollar only just above 109.00 amid reports that British Airways had suspended all flights into mainland China.

The UK CBI retail sales index remained at 0 for January and below consensus forecasts of 3. Retailers also expected no improvement for February maintaining unease over retail spending trends. With further speculation that the Bank of England would sanction a cut in interest rates this Thursday, Sterling gradually lost ground. In this context, the UK currency was unable to make headway even with an improvement in global risk appetite.

Futures markets indicated the chance of a Thursday rate cut were just above 50%. Sterling was also unsettled by trade doubts with concerns that the decision to grant Huawei limited access to the UK 5G network would complicate US trade talks.

A GBP/USD break below 1.3000 further eroded confidence while GBP/EUR rallied to 1.1825, but GBP/USD did recover 1.3000 at the US close. There was little change on Wednesday with domestic and global caution limiting activity and any potential buying interest.

Economic Calendar

Expected Previous
07:00 German GfK Consumer Confidence (FEB) 9.8 9.6
07:00 GBP Nationwide House Prices (M/M)(JAN) 0.30% 0.10%
07:00 GBP Nationwide House Prices (Y/Y)(JAN) 1.50% 1.40%
07:45 Consumer Confidence(JAN) 104 102
09:00 Consumer Confidence(JAN) - 110.8
09:00 CHF ZEW Expectations(JAN) - 12.5
12:00 USD MBA Mortgage Applications - -1.20%
13:30 USD Wholesale Inventories - -0.10%
15:00 USD Pending Home Sales (M/M)(DEC, 2019) 1.20% 1.20%
15:00 USD Pending Home Sales (Y/Y)(DEC, 2019) - 108.50%
19:00 FOMC Interest Rate Decision - 1.75%
19:30 FOMC Press Conference - -
21:45 NZD Trade Balance (M/M)(DEC, 2019) - -753M
21:45 NZD Trade Balance (Y/Y)(DEC, 2019) - -4.820M

*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.