Coronavirus fears lower global risk appetite
With no domestic economic data releases attention moved to wider global market moves and the underlying tensions ahead of UK/EU trade talks starting next week. EU representatives agreed their negotiating position and early glimpses of the draft showed slightly less bullishness than expected which could feed optimism for a compromise deal.
A dip in global risk appetite hampered the Pound; the Euro advanced to the 1.1900 area and the Dollar dipped below 1.2900 before it’s weakness prevailed. Andy Haldane, Bank of England chief economist stated that investment would be boosted as Brexit uncertainty continued to dissipate. Sterling eventually settled near 1.2930 on the Dollar and the Euro failed to break below 1.1900. This morning the Pound is a little higher as the global risk appetite has improved slightly.
Cleveland Federal Reserve (Fed) President Mester stated that it was difficult to assess the risk to the US economy of the coronavirus, but also stated that she was not concerned about an inverted yield cut at the moment. As equity markets came under pressure, however, there was a shift in interest rate expectations with Fed Funds futures indicating that the chances of a March interest rate cut had increased to over 20% from 10% last week with the chances of a cut before mid-year at close to 75%. Markets were also pricing in two rate cuts for 2020 as a whole.
The shift in interest rate expectations was a net drag on the US Dollar and against the Euro advanced to a peak around 1.0870 and held around 1.0850 this morning.
The Euro clings to its recent recovery above the 1.0850, as we begin Tuesday’s trading session with Dollar optimism on the back seat.
Despite it’s upside attempts, the Euro’s corrective advances against the Dollar from a 34-month low of 1.0777 is likely to remain limited as markets continue to believe the coronavirus outbreak in Italy is likely to throw Eurozone’s third-largest economy back into a recession. The fast-spreading coronavirus broke outside China over the weekend, claiming six deaths in Italy while more than 220 confirmed cases have been reported, with a majority in Northern Italy. The government asked 10 towns to be quarantined.
In the meantime, German Final GDP data is due for release this morning but will most likely not be a major market mover.
Data to watch
15:00 – USD – CB Consumer Confidence
15:00 – USD – Richmond Manufacturing Index