February’s UK Manufacturing PMI final reading was revised down to 51.7 from the preliminary reading of 51.9, although still a 16-month high. Orders increased for the second month on the bounce but delivery times increased sharply. Mortgage approvals hit a 4-year high in January, maintaining evidence of firm domestic demand. The global growth outlook continued to sap support preventing any Sterling correction, especially as the substantial UK current account deficit leaves the Pound vulnerable to a sell-off when risk sentiment is weak. Markets were also monitoring the opening day of trade talks between the UK and EU.
The Pound registered significant losses, the Euro strengthened to 1.1494 and the Dollar moved to just below 1.2750 before a Sterling recovery in choppy conditions. Testimony from the Bank of England and the government’s coronavirus contingency plans will be key factors today.
The US PMI manufacturing index was revised marginally lower to 50.7 from 50.8 previously. The ISM manufacturing index declined to 50.1 from 50.9 the previous month and below consensus forecasts of 50.5. New orders edged into contraction territory and employment continued to decline. Inventories declined on the month and delivery times lengthened to supply chain issues. The data was relatively close to market expectations but did not dispel expectations that the Federal Reserve (Fed) would cut interest rates by 0.50% by the March 18th policy meeting and possibly announce an emergency cut this week.
The dollar continued to lose support on expectations of much lower yields with the Euro advancing strongly to a 6-week high just above 1.1180. The ECB stated that it was monitoring the coronavirus situation closely and would respond as appropriate. The dollar index recovered slightly from 6-week lows with the Euro near 1.1140 on Tuesday amid choppy trading.
The upside in the Euro looks to have stalled against the Dollar as markets are pricing higher odds of an ECB rate cut next week. The pair are currently trading near 1.1120, having rejected the highs of 1.1185 yesterday.
The money markets are pricing in a greater chance that the ECB will lower its deposit rate next week. The central bank’s deposit rate currently stands at -0.5%, the lowest on record and as a result, many economists think the bank has no room left for further easing. Even so, rate cut bets have risen and expectations may increase further if the Eurozone’s CPI figures for February prints below the forecast for a 1.2% rise, drifting further away from the goal of just under 2%.
Data to watch
09:30 - GBP - Monetary Policy Report Hearings
10:00 - EUR - CPI Flash Estimate
All day - All currencies - G7 Meetings
Posted in Daily Market News on Mar 3 2020