The Euro-zone PMI manufacturing index was revised marginally to 49.2 in the final reading from the flash reading of 49.1 and confirmed at a 12-month high. The German index advanced to a 13-month high, but the Italian index retreated to a 2-month low. The data was a small net positive for the Euro, although wider global conditions dominated. Dollar confidence remained weak on expectations of rate cuts and the Euro gained an element of support from short covering. Markets also assumed that the ECB had very little scope to lower interest rates further, increasing pressure for a substantial fiscal stimulus.
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 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 6-week highs 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 dollar advanced to the 108.50 area ahead of the New York open, but failed to hold the gains and dipped towards 107.50 in early New York as equities lost ground. Risk appetite strengthened again in New York amid hopes that global central banks would loosen policy aggressively in an attempt to boost demand as volatility remained a key element.
The dollar, however, was unable to draw support lower yields and expectations of Fed rate cuts undermined wider US currency support. In this environment, the dollar only advanced to the 108.30 area despite S&P 500 gains of over 4.5% at the US close. Although Treasuries lost ground, overall 10-year yields undermined potential dollar support.
G7 finance ministers will hold a conference call ahead of Tuesday’s New York open and the latest reports suggested that there would be no immediate dramatic moves to cut interest rates. This triggered a fresh reversal in sentiment as US equity futures moved lower. The dollar overall remain on the defensive and retreated to the 107.70 area before a correction.
The final UK PMI manufacturing index was revised down slightly to 51.7 from a flash reading of 51.9, although this was confirmed at a 16-month high. Orders increased for the second successive month while delivery times increased sharply. Mortgage approvals increased to a 4-year high for January, maintaining evidence of firm domestic demand.
Sterling was unable to make headway as fears over the global growth outlook continued to sap support, especially in view of the substantial UK current account deficit which exposes the currency to potential selling when risk sentiment is weak.
Markets were also monitoring the first round of trade talks between the UK and EU. Sterling overall registered significant loses during the day with the Euro strengthening to 4-month highs above 0.8700. The UK currency also dipped to 4-month lows just below 1.2750 against the dollar before a recovery in choppy conditions. Markets will monitor testimony from Bank of England officials on Tuesday and government coronavirus plans with Sterling resisting further losses in early Europe.
The Swiss PMI business confidence index strengthened to 49.5 for February from 47.8 previously which suggested industrial resilience.
Swiss National Bank sight deposits increased to CHF 595.8bn in the latest week from CHF592.3bn the previous week. This was a significantly faster rate of increase and suggested more substantial intervention to restrain the franc last week.
The Euro moved sharply higher to a peak at 1.0700 before correcting while the dollar dipped to 0.9570. Further choppy trading is inevitable on Tuesday with the dollar around 0.9580.