Risk appetite dipped sharply in Asia on Monday as global coronavirus fears intensified.

Weaker than expected US PMI data dented US dollar confidence on Friday with the US currency retreating from 3-year highs.

Risk appetite dipped sharply in Asia on Monday as global coronavirus fears intensified. The yen regained some ground, but sentiment towards the Japanese currency remained weak amid Japanese economic fears.

The Euro secured slight relief after slightly stronger than expected PMI data, but EUR/USD failed to hold gains amid Italian coronavirus fears. Sterling drew limited net support from the PMI business confidence data.

The flash German PMI manufacturing index strengthened to 47.8 for February from 45.3 and above consensus forecasts of 45.0. The Euro-zone manufacturing index strengthened to a 12-month high of 49.1 from 47.9 as orders declined at the slowest rate for 15 months. There was a small improvement in the services index to 52.8 from 52.5 with the composite index at a 6-month high. ECB Chief economist Lane stated that his best case for the coronavirus outbreak was for a V-shaped recovery. He also stated that services-sector growth and manufacturing stabilisation are sources of some optimism.

The US PMI manufacturing index declined to a 6-month low of 50.8 for February from 51.9 the previous month and below consensus forecasts. There was also a sharper downturn for services to 49.4 from 53.4 previously and the lowest reading since October 2013. New orders declined for the first time since the current series started in October 2009. Employment increased at a slower pace while pricing pressures eased slightly. Manufacturing activity was undermined to some extent by supply-chain issues due to the coronavirus outbreak. Regional business surveys had indicated robust readings for the month which increased the PMI surprise element and the dollar moving notably lower with EUR/USD recovering to near 1.0850.

USD/JPY found support just below 111.50 in early Europe on Friday and re-tested the 112.00 area ahead of the New York open. Treasuries rallied sharply following the US PMI data with the 10-year yield declining to near 1.45%. The dip in yields was a key factor undermining the dollar and a retreat in equity markets triggered an element of yen demand, although alternative defensive assets such as gold continued to out-perform. In this environment, USD/JPY dipped again to below 111.50.

There was underlying unease over the coronavirus outbreak with fears that international cases were increasing while the WHO warned that the potential for halting a global pandemic was fading. Risk sentiment dipped again on Monday, although Japanese markets were closed for a holiday while Chinese equities were resilient. The yen continued to under-perform relative to gold amid fears over damage to the Japanese and Asian economy with USD/JPY trading just above 111.50.

The UK PMI manufacturing sector returned to expansion for February with a flash reading of 51.9 and the highest reading for 10 months. There was a slight slowdown in the services sector index to 53.2 from 53.9 with the overall composite index unchanged at 53.3 and equalling a 16-month high.

Orders growth improved, although there was evidence of stresses from the coronavirus as manufacturers faced supply-chain difficulties. The data provided a slight lift to Sterling with global currency moves tending to dominate. GBP/USD advanced to near 1.2970 as the dollar dipped, but failed to make headway against the Euro amid fragile global risk appetite.

CFTC data recorded an increase in long Sterling positions to near 30,000 contracts and close to 22-month highs, maintaining the risk of selling if sentiment dips.

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