05-Mar-2020

1) Dollar Higher On Short-Covering After Fed’s Rate Cut
2) GBP/USD Remains Positive For The Third Day In A Row
3) EUR/USD Posted Losses On Wednesday Amid Risk-On Action In The Us Equities
4) Gold Snaps Two-Day Recovery Amid Risk Reset

1) Dollar Higher On Short-Covering After Fed’s Rate Cut

The greenback ended the day higher on Wednesday due to short-covering after Federal Reserve’s surprise 50 basis points rate cut on Tuesday. Sterling rallied across the board in New York after incoming Bank of England Governor, Andrew Bailey, said action could be needed to offset the effects of the coronavirus.

Versus the Japanese yen, although dollar extend its recent losing streak and hit a fresh 4-1/2 month low at 106.86 in Australia after Fed’s surprise rate cut on Tuesday, price staged a strong rebound to 107.68 on short-covering before retreating to 107.16 in New York morning due to weakness in U.S. Treasury yields but only to recover to 107.56 on firm gains in U.S. equities.

The single currency met renewed selling at 1.1185 in Australia and fell to 1.1144 ahead of European open. Despite a brief jump to session highs at 1.1186, the pair later dropped to an intra-day low of 1.1096 in New York morning on growing speculation that the European Central Bank will also cut its interest rate as well as downbeat France and German services PMI before rebounding to 1.1144 on short-covering.

Reuters reported French service activity accelerated to a four-month high in February, before the spread of the coronavirus began taking its toll on the euro zone’s second-biggest economy, a survey showed on Wednesday.    Data compiler IHS Markit said its purchasing managers index for services rose in February to 52.5 from 51.0 in January, just below a preliminary reading of 52.6.

Reuters reported Growth in Germany’s services sector slowed in February to reach its lowest in three months as the coronavirus epidemic pushed down new business with China and other foreign clients, a survey showed on Wednesday.    Germany has reported nearly 200 cases of the disease, which is quickly spreading around the world.    IHS Markit’s final services Purchasing Managers’ Index (PMI)fell to 52.5 in February from 54.2 in the previous month. This was the lowest reading since November and much weaker than the flash estimate of 53.3 published last month.

And the Euro zone businesses largely withstood the impact of the coronavirus in February, growing at their fastest pace in six months, though a survey on Wednesday painted a gloomier outlook, with falling export demand and disruptions to supply chains.    IHS Markit’s Composite Purchasing Managers’ Index for the euro zone, the first key gauge of February’s economic health published, nudged up to 51.6 from January’s 51.3. That matched an earlier flash reading and was well clear of the 50-mark separating growth from contraction.

The British pound went through a roller-coaster ride. Although cabled rebounded to 1.2831 shortly after Asian open, price met renewed selling and intra-day fall accelerated at European open and later dropped to session lows at 1.2771 on speculation that the Bank of England will cut its interest rate at its next meeting on March 26th. However, the pair then erased its losses and rallied to an intra-day high at 1.2873 near New York closing due to comments from next Governor of the Bank of England, Andrew Bailey before stabilising.

Reuters reported Britain’s economy grew at its fastest rate since September 2018 last month, though manufacturers and the services industry increasingly felt the impact of the spreading coronavirus as the month went on, a business survey showed on Wednesday.    The all-sector IHS Markit/CIPS UK Purchasing Managers’ Index rose to 53.0 in February from 52.8 in January, as a jump in construction activity outweighed small losses in momentum in the larger services and manufacturing sectors.    The services PMI slipped to 53.2 from a flash estimate of 53.3 and a 16-month high of 53.9 in January, which reflected a post-election bounce in business sentiment that risks being undermined by the coronavirus.

They also  reported Andrew Bailey, the next governor of the Bank of England, said on Wednesday that he wanted to see more evidence about the economic impact of the coronavirus outbreak before deciding whether to cut interest rates.    “I think what we need frankly is more evidence than we have at the moment, as to exactly how this is feeding through,” Bailey told parliament’s Treasury Committee when asked if he favoured a rate cut before the BoE’s next scheduled policy announcement on March 26.    “We have got a building picture of evidence. The Bank of England is … working extremely hard on it. I have been engaged on it this week, and I think then we can reach our judgment.”

In other news, Reuters reported Europe needs to be ready to use fiscal stimulus to deal with the impact of the coronavirus outbreak on economy, French Finance Minister Bruno Le Maire said on Wednesday.    Le Maire also told French BFM Business radio that the euro zone would have to boost budget spending if the coronavirus outbreak lasted and economic growth was impacted.

On the data front, Reuters reported U.S. services sector activity accelerated to a one-year high in February, suggesting underlying strength in the economy despite the coronavirus outbreak, which has triggered financial market fears of a recession and led to an emergency interest rate cut from the Federal Reserve.    The Institute for Supply Management (ISM) said on Wednesday its non-manufacturing activity index increased to a reading of 57.3 last month, the highest level since February 2019, from 55.5 in January.    A reading above 50 indicates expansion in the services sector, which accounts for more than two-thirds of U.S. economic activity. Economists polled by Reuters had forecast the index falling to a reading of 54.9 in February.

2) GBP/USD Remains Positive For The Third Day In A Row

While following its three-day winning streak, GBP/USD registers 0.04% gains to 1.2875 ahead of the London open on Thursday. The Cable seems to have benefited from the US dollar weakness while the BOE’s refrain from further rate cuts also contributes to the pair’s recovery moves. Hence, traders will keep eyes on today’s speech from the BOE Governor Mark Carney for near-term direction.

As expected, diplomats from the European Union (EU) and the UK continue to cross each other on every aspect of the post-Brexit trade deal negotiations. Fisheries have been the key for the British negotiators and they have warned to deploy Navy to safeguard the waters from the bloc’s ships if no deal is agreed by June. While identifying this, the Vice President of the European Parliament, Katarina Barley, recently said it was an important agreement was reached over these three areas but expressed skepticism that a deal can be achieved within the time limit.

At home, Sky News spots former business secretary Andrea Leadsom while stating that the government’s previous preparations for a potential no-deal Brexit stand it in “incredibly good stead” to help firms deal with the impacts of the coronavirus (COVID-19) outbreak.

The deadly virus continues to grow outside China with California recently announcing a state of emergency. However, the global policymakers’ efforts to counter the same seems to have helped the risk-tone off-late. That said, the US 10-year treasury yields remain positive above 1.000% whereas stocks in Asian are also positive by the press time.

The BOE Governor Mark Carney is due to speak at University College London and will be closely observed for the UK central bank’s actions to combat COVID-19 implications. However, the incoming Governor Andrew Bailey has already said that the BOE should wait until it has more clarity about the economic hit from the coronavirus outbreak before making any decision to cut interest rates.

3) EUR/USD Posted Losses On Wednesday Amid Risk-On Action In The Us Equities

EUR/USD fell by 0.32% on Wednesday, ending the four-day winning streak and could suffer losses for the second day if the risk recovery in the financial markets gathers steam.

Having put on a good show during last week’s risk aversion, the common currency faced selling pressure on Wednesday, as the US stock markets rallied after the US House of Representatives authorized nearly $8 billion for virus prevention.

The S&P 500 closed 4.22% higher on Wednesday and the 10-year treasury yield rose from 0.98% to 1.06%.

The ISM non-manufacturing index reported robust growth in February, adding to the bullish tone around the greenback.

If the risk-on action continues, the selling interest around the EUR will likely strengthen. At press time, major Asian indices like Japan’s Nikkei,  South Korea’s Kospi, Hong Kong’s Hang and the Shanghai Composite index are reporting notable gains. The S&P 500 futures, however, are shedding 0.90%.

If the OPEC meeting fuels an oil price bounce, the risk sentiment will likely strengthen, pushing the EUR and other haven currencies lower. The pair is currently sidelined just below 1.1140.

Apart from the broader market sentiment, the pair may take cues from the US weekly jobless claims, Challenger Job Cuts data for February and the fourth quarter Unit Labor Costs figure scheduled for release during the North American trading hours. The European data docket is thin.

4) Gold Snaps Two-Day Recovery Amid Risk Reset

Gold prices pull back from five-day high to $1,637.50, down 0.07%, during the Asian session on Thursday. While the US dollar pullback from monthly lows can be considered against the yellow metal’s recent upside, the recent recovery in risk-tone has also contributed to the bullion’s weakness.

Not only the rate cuts from the top-tier central banks but the use of fiscal measures and policy actions have also boosted the traders’ anticipation that the global policymakers are doing all they can to confront the deadly coronavirus (COVID-19).

With this, the broad risk-off seems to have stepped back, which in turn helps the US 10-year treasury yields to recover from the record low to 1.05% by the press time.

On the other hand, upbeat prints of the US ISM Non-Manufacturing PMI and ADP Employment Change contributed to the US dollar pullback from the early-January lows.

Even so, an increase in the numbers of the global coronavirus outbreak and the latest state of emergency declared by Californian Governor over COVID-19 seem to support the risk aversion. Earlier during the day, policymakers from Australia and South Korea have also raised concerns about the deadly virus.

That said, any updates relating to the pandemic will be the key to forecast near-term trade direction of the safe-haven.