Dollar falls on weak manufacturing data, sterling rallies from lows on renewed Brexit optimism

Market Review - 03/09/2019  23:56GMT  

Dollar falls on weak manufacturing data, sterling rallies from lows on renewed Brexit optimism

The greenback fell across the board in New York session on Tuesday as release of downbeat U.S. manufacturing data increased speculation of a Federal Reserve rate cut in September and sent U.S. Treasury yields lower with benchmark 10-year yield hitting 3-year lows of 1.4288%. Sterling rallied from a 34-month low after UK lawmakers approved a motion to seize control of parliamentary time to try to block Britain leaving the European Union with a no-deal.  
  
Reuters reported the U.S. manufacturing sector contracted in August for the first time since 2016 amid worries about a weakening global economy and rising trade tensions between China and the United States, an industry report released on Tuesday showed.  The Institute for Supply Management (ISM) said its index of national factory activity decreased to 49.1, the lowest level since January 2016.  This compared with a figure of 51.2 in July. Analysts polled by Reuters had forecast a reading of 51.1 for August.  
  
Versus the Japanese yen, dollar briefly gained to session highs at 106.38 in Asian morning before dropping to 105.93 in early European morning on active safe-haven selling in jpy due to U.S.-China trade tension. Despite a rebound to 106.30 in New York morning due partly to a recovery in U.S. Treasury yields, the greenback tumbled to an intra-day low at 105.75 in New York after release of weak U.S. data together with selloff in U.S. equities (Dow ended down 285 points, or -1.08%), however, price staged a minor recovery in tandem with U.S. yields in New York afternoon trading.  
  
Reuters reported U.S. President Donald Trump said on Tuesday that trade talks between the United States and China were going well, though he warned that he would be "tougher" in negotiations if they dragged on until his second term.  
  
The single currency remained under pressure in Asia and dropped to 1.0931 in Asia, then lower to a fresh 27-month trough at 1.0927 in European morning. However, price then erased its losses and rallied to session highs of 1.0978 in New York morning due to short covering following news of ECB stimulus together with usd's broad-based weakness before moving sideways.  
  
Reuters reported ECB policymakers are leaning towards a stimulus package that includes a rate cut, a beefed-up pledge to keep rates low for longer and compensation for banks over the side-effects of negative rates, five sources familiar with the discussion said.  Many also favour restarting asset buys, a significantly more powerful weapon, but opposition from some northern European countries is complicating this issue, the sources, who declined to be named, added.  An ECB spokesman declined to comment. The sources stressed that no decisions had been taken and discussions were ongoing, including on the size of the rate cut.  
  
The British pound went through a volatile session. Cable remained under pressure following selloff on Monday and tumbled to a 34-month trough at 1.1959 in early European morning on continued market woes of a snap U.K. election. However, price then erased its losses and jumped to 1.2084 in Europe on news of an emergency Brexit debate. Despite retreating to 1.2014, the pair later rallied to session highs at 1.2105 in New York mid-day as opposition U.K. lawmakers approved a motion to prevent a no-deal Brexit before trading narrowly.  
  
Reuters reported an alliance of opposition parties and rebels in Prime Minister Boris Johnson's party have applied for an emergency debate in an attempt to grab control of the business of the lower house of the British parliament in a bid to thwart a no-deal Brexit.  "An application for an emergency debate on the European Union (Withdrawal) has been submitted," the House of Commons said. "The Speaker will consider it later today. If successful, the debate takes precedence over today's scheduled business under Standing Order 24."  "If the debate takes place today, the debate may continue for the length given by the Speaker or until 10.00 pm, whichever is the earlier," the House of Commons said.  
  
Reuters reported British Prime Minister Boris Johnson lost his working majority in parliament on Tuesday when one of his Conservative lawmakers defected to the pro-European Union Liberal Democrats.  Phillip Lee crossed the floor of the House of Commons just as Johnson began giving a statement on last month's G7 summit.    
Reuters reported British lawmakers defeated Boris Johnson in parliament on Tuesday in a bid to prevent him taking Britain out of the EU without a divorce agreement, prompting the prime minister to announce that he would immediately push for a snap election.   The government was defeated by 328 to 301 on a motion put forward by opposition parties and rebel lawmakers in Johnson's party - who had been warned they would be kicked out of the Conservative Party if they defied the government.   
  
In other news, Reuters reported the U.S. Congress has enough votes to pass a new trade agreement signed by the United States, Mexico and Canada, and doing so would send a positive signal for stalled U.S.-China trade talks, the chief executive of the U.S. Chamber of Commerce told CNBC on Tuesday.   Thomas Donohue said congressional passage of the U.S-Mexico-Canada (USCMA) trade agreement would help boost the U.S. economy and reassure financial markets, which have been roiled by tit-for-tat tariffs imposed by China and the United States.   
  
Data to be released on Wednesday:  
  
Australia AIG services index, GDP, Japan services PMI, China Caixin services PMI, Italy Markit services PMI, France Markit services PMI, Germany Markit services PMI, EU Markit services PMI, retail sales, U.S. MBA mortgage applications, good trade balance, redbook, ISM New York index and Canada trade balance, exports, imports, labour productivity rate, BoC interest rate decision.