Euro rallies following better-than-expected manufacturing PMIs, as risk appetite takes hit after Bernanke comments

Tom Tong24/May/2013Currency Updates

USD

The dollar fell against the yen in Asian trading Friday, having rapidly given back earlier gains in the afternoon session as the yen gained strength on the back of a huge slump in poor Chinese data, with the Nikkei Stock Average, the largest single-day decline for more than two years. Volatility in the currency market reflected the strong focus on share prices coupled with fears over the US economy.

Answering questions in Congress on Wednesday night was Fed Chairman Ben Bernanke, who seemed to U-turn on earlier comments by hinting that the central bank could begin to scale back quantitative easing “in the next few meetings” if there is a sustained improvement in the economy.

Thursday saw better-than-expected economic data from the US – with jobless claims coming in lower than forecast while new-home sales beat estimates – throwing more weight behind the argument to tighten monetary policy.

The American job market is gradually returning to health as unemployment benefits fell by 23k. Over the past 6 months there has been a steady job growth which has coincided with the decline in claims. However, companies must still gain further confidence in the economy to reach a more normal unemployment level of between 5.5% -6%. The Fed plans to keep its interest rates near 0 until unemployment is below 6.5%.

Finally, yesterday we saw the US Manufacturing Purchasing Managers Index fell to a 7-month low of 51.9 in May from 52.1 in the previous month. A result above 50 indicates expansion.

GBP

Yesterday, Bank of England director Andy Haldane drew our attention to the issue of ultra-low interest rates and it’s potential of leading to another crisis in the U.K Holding interest rates at rock bottom could lead to borrowers becoming over-stretched without realising costs could shoot up up in the future, harming borrowers and the banks that lend to them. In summary, Haldane is concerned of stimulating too much risk, accompanied with over inflated asset prices, and setting in motion a leveraged bubble that invariably lead to another crisis.

Sterling slipped against the dollar on Wednesday following a surprise decline in UK retail sales. The data rekindled the view that the Bank of England could decide on further monetary easing in the coming months. Yesterday, a second estimate of the U.K’s Gross Domestic Product quarter-on-quarter remained at 0.3%, having a neutral effect upon the market. In other Macro news, The FTSE 100 suffered its sharpest one day drop in a year, closing down 2.1 percent.

At a speech given to the City of London Corporation, Mario Draghi reflected the unease in continental Europe about the damaging effects of the bloc that might arise from a British exit from the EU. His speech highlights Draghi’s desire for a more European UK and how Europe’s future is inextricably linked to U.K s membership of the economic union.

EUR

The euro rallied yesterday on the back of better-than-expected PMI figures from the eurozone. German and French manufacturing PMIs both surprised to the upside, rising to 49.0 and 45.5 from 48.1 and 44.4 in the previous month respectively. Overall eurozone manufacturing PMI showed an improvement to 47.8 from 46.7 last month. However, all of these figures still showed the manufacturing sector contracting, albeit at a slower rate.
In London yesterday, President of the ECB Mario Draghi highlighted that three of the eurozone’s weaker economies, Ireland, Spain and Portugal had made notable improvements in their export performances, going on to say that bank lending remained sluggish, though that too was improving for businesses and households.

Contrary to President Draghi’s positive tone, this month he cut eurozone interest rates to an all time low, with latest figures displaying the majority of the eurozone economies are declining. The strongest of the eurozone, Germany, scarcely achieved any growth within the first quarter of this year.However, the German consumer confidence survey was up to 6.5 in June from 6.2 in May.

Regardless of the cut, the euro as a currency has remained stable, with President Draghi saying that the markets are “fully confident that the euro is a strong and stable currency”.

Data releases of note today all come from the strongest economy in the Eurozone, Germany; Gfk Consumer Confidence Survey expected to increase from 6.2 to 6.5, GDP expected to contract YoY, IFO Business Climate expected to remain the same and German Buba President Weidmann speech later this morning.

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Written by Tom Tong

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