Traders react to flash PMIs and central bankers' speeches

Despite closing in solidly positive territory on Monday, US markets have given up their positive momentum overnight. This has the result that Tuesday's European open is likely to be negative. UK public sector borrowing and flash PMI data will dominate today's mood, along with ECB President and Fed chair comments in Davos.

Multiple threats to the global economy topped the worries at the annual Davos meeting, with some pointing to the risk of a worldwide recession.

World Economic Forum (WEF) participants gather as inflation rises to its highest level in a generation against the backdrop of a global economy experiencing boom-bust cycles.

US dollar

Against six major peers, the dollar index climbed 0.1% to 102.24, bouncing back from a 0.85% decline that had removed it from the nearly two-decade high it reached in mid-May. There is no reason to expect the dollar to flip to a negative trend anytime soon since the Fed will continue to remain more hawkish than any other major central bank. It is only a matter of time before the rest of the central banks stop turning a blind eye to inflation. That should help stem the dollar's appreciation. 

Gold

Gold's gains are strengthened by the softening dollar and the drop in US yields. Earlier, yellow metal rose to $1865 per ounce, and it is looking for support at $1850 for a further advance toward $1875/1880. 

Events of today

A key focus for currency traders on Tuesday will be the release of the manufacturing PMIs. If the data are strong, the trend of an easing dollar should continue as the global economy recovers from various shocks. If figures are weaker than predicted, it could indicate a slowing economy, thus holding the dollar steady.

In terms of the broader economy, it is evident that both the EU and UK are experiencing slow growth.

Based on PMI numbers, it would appear that everything is going well. However, rising energy prices and supply chain disruptions are posing significant challenges to large and small businesses alike.

For the UK, Germany, and France, all three manufacturing and services PMIs are expected to slow from their April levels in the mid-'50s. However, the slowdown will not be significant.

German manufacturing is expected to slow to 54, from 54.6, and services will drop from 57.6 to 57.1. Manufacturers in the UK are expected to slow to 55 from 55.8, and services from 58.9 to 57.0. Manufacturing in France will likely fall to 55.2, from 55.7, and services to 58.5, from 58.9. Later in the day, the American Petroleum Institute will release US crude oil supply data.