Firstly, manufacturing data out of the US yesterday was much stronger than the market had expected. According to ISM, the latest manufacturing index jumped back into an expansionary 50.9 in January from an upwardly revised 47.8. A surge in new orders helped lift the index out of recessionary territory for the first time in five months, no doubt helped by an alleviation in trade concerns following the striking of the ‘phase 1’ US-China trade deal in December.

The past 24 hours has also seen a move higher in the USD/JPY cross off its lowest level in three weeks. Fears surrounding an escalation in the coronavirus outbreak have been somewhat allayed in the past few days, leading to an unwinding in Japanese yen safe-haven flows. The market has reacted positively to the response in China, and has been encouraged by the fact that the virus so far remains mostly contained within the country’s borders. While 150 cases have been reported outside of China, this only accounts for less than one percent of all those affected. Provided the virus remains contained, we think we could see another move higher in USD/JPY as investors continue to unwind safe-haven trades.

Pound tumbles on Johnson’s ‘no deal’ stance

The move higher in the dollar index can also, at least in part, be attributed to a fairly abrupt move lower in the pound in the past 24 hours or so. Sterling extended its slide to over one-and-a-half percent for this week alone on Tuesday morning following some more hardline comments from PM Boris Johnson.

Johnson has stated in the past few days that he would prefer a ‘no deal’ Brexit at the end of the year, rather than meeting some of the EU’s key demands. Let’s not forget, however, that the prime minister insisted on keeping an October ‘no deal’ on the table when he was named Tory leader, only to ask for a delay and get a deal done through the commons in January. This rhetoric is again likely to be a negotiating tactic. Should the market come round to this idea, we would expect a recovery in sterling.

Yesterday also kicked off the latest string of business activity PMI numbers out of the UK. Monday’s manufacturing index modestly beat expectations, finally moving out of contractionary territory for the first time in nine months to the level of 50.0 that represents flat growth. Given its importance to the UK economy, Wednesday’s revised services PMI for January will likely be the biggest market mover. In the meantime, this morning will see the release of the construction index, with economists expecting a small move higher from the December number.

ECB President Lagarde to speak this week

The euro edged only modestly lower on Monday, with investors largely ignoring the marginally better-than-expected Euro Area PMIs. The manufacturing index for January was revised higher to 47.9 from 47.8, helped chiefly by a sharp upward revision to the Italian number.

A dump of Euro Area economic data should keep investors busy this week. The most noteworthy will be Wednesday’s services PMI and retail sales numbers, as well as Friday’s German industrial production numbers. We will be looking for continued signs that activity in the Eurozone economy is picking up steam from its recent lows. A speech from European Central Bank President Lagarde and the latest growth forecasts from the European Commission (both on Thursday) could also prove market movers.