Euro-zone GDP was confirmed at 0.1% for the fourth quarter of 2019 with a marginal revision in the year-on-year rate to 1.0% from 0.9%. Markets remained very uneasy over the Italian situation as a national lock-down came into operation. Domestic activity will inevitably be hit hard and there will also be fears over a wider Euro-zone impact on trade disruption. German Chancellor Merkel also appeared to reject an immediate fiscal stimulus which undermined Euro sentiment.
Markets continued to price-in an interest rate cut at Thursday’s ECB meeting, but the bank has little room for manoeuvre.
The US NFIB small-business index increased slightly to 104.5 for February from 104.3 previously and significantly above consensus forecasts with no evidence within the data that the coronavirus outbreak had a significant impact.
The dollar was able to recover some ground during Tuesday as US yields moved higher while commodity currencies lost ground. There was a shift in futures markets in Europe with the chances of a 0.75% rate reduction on March 18th declining to below 50% which helped support the dollar, although volatility remained high across all asset classes.
The Euro was hampered by renewed selling in Euro-zone equities as major indices ended in negative territory with the single currency retreating to 1.1300 against the dollar. The US currency continued to regain ground into the New York close, but the dollar faded again on Wednesday with the Euro advancing towards 1.1350 as US rate cut expectations increased again.
Global equity markets maintained a firm tone ahead of Tuesday’s New York open and, with US yields moving higher, the dollar was able to move higher. Expectations of US fiscal support measures were significant in underpinning dollar sentiment with reports that payroll taxes could be suspended for 90 days. As bond yields continued to move higher, the dollar moved back above 105.00 after the European close with a peak around 105.30 as the S&P 500 index gained close to 5.0%.
Volatility remained high with confidence dipping again in Asia on Wednesday as there were no definitive stimulus plans from the US Administration which maintained uncertainty. Biden secured victory in the latest round of Democrat primaries.
Domestically, Japan recorded an increase in coronavirus cases which undermined sentiment and equities retreated once again. Japan’s Ministry of Finance warned over market volatility and that rapid yen swings, whether up or down, were undesirable. As US yields declined, the dollar retreated to the 104.30 area with markets braced for further high volatility.
Sterling was unable to make headway on Tuesday and gradually lost traction as previous position adjustment and the weaker US dollar ran its course. Underlying concerns over the global economy was a significant negative factor given the UK exposure to international trade volumes and under-performance in UK equities also curbed Sterling support. The UK currency dipped to lows near 1.2900 against the dollar with the Euro advancing to the 0.8780 area in choppy trading.
Chancellor Sunak will announce the latest UK budget on Wednesday and Sterling gained some support after government claims that overall infrastructure spending would be increased to £600bn over 5 years, but gains faded again as sentiment towards the overall economic outlook remained negative. Initial currency gains on Wednesday reversed after the Bank of England cut interest rates in an unscheduled move to match record lows of 0.25% from 0.75%. The bank will also introduce a new funding scheme for small businesses. Sterling dipped below 1.2900 with the Euro at 5-month highs above 0.8800.
The Swiss franc lost some ground during Tuesday as equity markets stated a recovery. The Euro was able to hold close to 1.0600 while the dollar strengthened to highs near 0.9400 before a correction with choppy trading continuing.
There was still an element of caution over the outlook, especially given that Switzerland has a border with Italy and economic links could be disrupted. In this environment, the franc could find it more difficult to attract defensive support. The franc was resilient on Wednesday as equities declined with the dollar retreating to 0.9330.