The Euro failed to sustain gains in choppy conditions ahead of Wednesday’s New York open. Chancellor Merkel’s warning over the risk of very substantial coronavirus cases within Germany undermined sentiment, especially with further bickering over a fiscal response. There were also reports that the US would impose additional travel restrictions on EU countries.
US consumer prices increased 0.1% for February, slightly below consensus forecasts of 0.2% with the year-on-year rate at 2.3% from 2.5%. Core prices increased 0.2%, with an annual increase slightly above market expectations at 2.4% from 2.3%.
The dollar regained ground during New York trading with Euro losses steepening to near 1.1250 after a break below 1.1300.
After the US close, President Trump announced that it would ban travel from much of Europe for 30 days. The ban will apply to anyone who has been in the Schengen area within the past 14 days. Although there will be damage to the Euro-zone, risk appetite also deteriorated and the Euro secured a recovery to near 1.1300 as markets expected at least a 0.75% Fed cut.
Markets are expecting a small ECB rate cut at Thursday’s policy meeting and the potential for more favourable lending packages for banks. Bank President Lagarde is likely to emphasise the need for an urgent fiscal response and her press conference overall will be important for market sentiment with further choppy trading inevitable during the day.
According to sources, the Bank of Japan is likely to ease monetary policy next week to prevent market volatility from affecting business sentiment with increased ETF buying the most likely outcome, although there was no consensus as yet.
The dollar pushed to highs around 105.35 following the reports, but failed to sustain the gains as equity markets remained in negative territory. The World Health Organisation (WHO) declared that the coronavirus did represent a pandemic which reinforced risk aversion. Wall Street indices continued to lose ground in New York and the US currency dipped below 105.00.
President Trump’s announcement of a travel ban increased fears over the global impact and a lack of detail on domestic supportive measures triggered a further downturn in risk appetite with equity markets registering sharp losses as the Nikkei 225 index declined 4.5%. Japan’s Finance Ministry again warned over currency-market moves and the Bank of Japan stated that it was ready to respond further, but the dollar dipped to near 103.0 before a recovery to 103.60.
As well as the cut in interest rates to a record-equalling low of 0.25%, the Bank of England announced a new lending facility which would boost potential lending to businesses and ensure that lower interest rates are passed on to customers.
UK data was weaker than expected with GDP unchanged for January compared with market expectations of a 0.2% increase. The year-on-year increase also declined to 0.6% an upwardly revised 1.2% previously with weak industrial data.
Chancellor Sunak announced a £30bn stimulus package for 2020 with additional funding for the NHS and a substantial business support package. He also announced a £175bn increase in spending over the next five years. Budget deficit forecasts were revised up sharply with fiscal rules likely to be broken. Sterling gradually lost ground as global equities dipped.
There was speculation that the next round of EU/UK trade talks could be cancelled, but the US travel ban does not apply to the UK. RICS housing data strengthened to the highest level for close to 4 years, but risk conditions dominated with another government COBRA meeting on Thursday. The Euro traded above 0.8800 with Sterling near 1.2800 despite dollar fragility.
The Swiss franc drew only limited support from weaker equity markets during Wednesday. The Euro was able to gold just below 1.0600 while the dollar again challenged 0.9400. Markets remained uneasy over European coronavirus developments in Europe which could have a negative impact on the Swiss economy.
Further deterioration in risk appetite triggered fresh demand for the Swiss currency on Thursday with the Euro retreating to near 1.0550 while the dollar retreated to 0.9350. The ECB response watched closely later in the day amid expectations of SNB intervention.