Headlines surrounding the coronavirus outbreak are back dominating the headlines again in the FX market.

Concerns surrounding the virus had unquestionably eased in the financial markets last week, with currency trading beginning to return to at least some sense of normalcy. In fact, the rate of growth in the number of overall confirmed cases, and indeed deaths, has eased fairly sharply in the past ten days or so. Approximately 80,000 cases of the virus have now been reported across the globe in a total of 30 countries at the time of writing, leading to the deaths of a little over 2,700 people.

The real cause for concern for investors is the jump in cases outside of the Chinese borders. As of 20th February, approximately 1,200 cases of the virus had been confirmed in countries other than China. This has since doubled (as of 25th February), with Italy, South Korea and Iran, among others, announcing a jump in both the number of confirmed cases and fatalities over the weekend. This brings the subtotal for coronavirus cases outside of China to 2,600, approximately 3.2% of the total number of global cases. This is a fairly sharp jump considering this figure had been contained to less than 1% throughout almost the entirety of the outbreak thus far.

The reaction in the FX market has actually not been as severe as one may have expected, certainly not as violent as the swings witnessed in equity markets. The yen strengthened again as investors once again favoured it as a safe-haven destination, while the South Korean won slumped around one percent due to the jump in the number of cases there. Other than that, the moves were largely contained, a sharp departure from the near 3% sell-off witnessed in US equity markets.

Euro rallies despite growing virus fears

Currency trading this week is likely to continue to be dominated by coronavirus headlines, rather than macroeconomic or central bank announcements.

One of the most notable developments so far this week has been the resilience of the euro, which had been one of the worst performers amid the ongoing virus headlines. As we mentioned in our weekly report yesterday, this to us indicates that the currency’s recent fall has more to do with the establishment of carry trades rather than virus fears, in which investors short (or borrow) the euro in order to take advantage of higher interest rates elsewhere.

The common currency was instead one of the best performers on Monday and is now back trading above the 1.05 level at the time of writing. Investors may also have been encouraged by Monday’s IFO sentiment data for February, which showed a modest improvement on the previous month. The rest of the week is fairly light in terms of EZ data. The lack of any more negative macroeconomic news could actually help the euro in the coming days.

EU negotiations, budget content to drive sterling

Sterling continues to chug along just above the 1.29 level versus the dollar. With no tier-one data in the UK whatsoever this week, sterling traders will instead be focusing on developments elsewhere and any Brexit related headlines that may happen to hit the newswires.

The two main domestic developments in the near-term are likely to be the state of the UK and EU negotiations and the content of the UK’s spring budget. In terms of the former, we expect both sides to continue to strike a hard-line stance in the immediate-term, before the UK finally caves and asks for an extension to the transition deadline. Regarding the latter, the budget is now likely to be delayed, with any increase in fiscal stimulus already largely expected and mostly priced into the market.