Euro claws back gains as UK PMI surprises to the upside

Tom Tong06/Feb/2013Currency Updates

GBP

Despite positive economic data, Cable took a major hit in yesterday’s trading session. The pair ended the day with a significant 0.8% loss.

U.K.’s Services PMI that was released yesterday surprised the markets. It showed a reading of 51.5, which is notably higher than the 49.8 forecast. It is also higher than 50.0, which means that the services industry is expanding.

It seems that Cable’s sell-off yesterday was mainly the work of bad data elsewhere. For instance, ISM Non-Manufacturing PMI, even though it came in as expected at 55.2, was lower than the reading from the month before. Analysts also noted that the underlying debt rating concerns weighed heavily on Cable.

Today, only the Halifax House Price Index (HPI) was published at 8am, coming in at 1.3%, below the forecasted 1.5%. Last month, the HPI showed a 1.3% increase. Falling house prices are normally considered bearish for the domestic currency because market participants consider it as a leading indicator of economic health. Lower house prices could turn away investors and hurt growth.

EUR

The euro had a good day yesterday pairing half of its losses from Monday against the dollar. EUR/JPY was up 194 pips from its opening ,while EUR/GBP finished 97 pips higher by the end of the New York session

One reason for the moves was positive data being released from the euro zone. The Spanish services PMI printed higher at 47.0 than what markets were expecting at 44.7 while the final EZ services PMI saw an upward revision from 48.3 to 48.6. Of course, it also helped that risk appetite was up. The S&P 500 rallied to 5-year highs, indicating that investors are willing to seek “riskier” assets.

Spain’s Mariano Rajoy is being asked to resign by the opposition party. Though Rajoy is denying his corruption allegations, the call for resignation was enough to boost Spanish bond yields back to its six-week highs.

Italian bond yields also shot up yesterday thanks to increasing probabilities that former Prime Minister Silvio Berlusconi would win the current elections. Thanks to the news, Italian bond yields are now at highs not seen since early December.

USD

With currencies moving according to country-specific factors, it’s no surprise that the dollar’s price action was very mixed. The Greenback posted gains against the yen and the pound but lost to the euro.

Just when we thought that the dollar was about to take back its losses from last week, risk sentiment showed improvement in the euro region. In addition, Japan’s BOJ Governor Shirakawa provided a boost to the higher-yielding currencies when he announced that he’s stepping down three weeks early, which hinted that the government would implement more stimulus programs sooner than expected.

The IBD/TIPP economic optimism report supported the rally in equities though, when it came in at 47.3 instead of the expected 46.1 reading.

No major US reports are scheduled for release today, so pay close attention to the potential price action drivers from the other major economies. For instance, take a close look at the German factory orders at 12:00 pm GMT today as well as the IVEY PMI data at 4:00 pm GMT

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Written by Tom Tong

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