Daily Currency report

From Peter-John Theuninck, Currency Analyst at Baydonhillfx

Headline UK construction PMI figures came out lower than expected but the sector remained in expansion territory which boosted confidence in the Pound. UK PMI construction fell to 5.4 from 53.2 in January but when combined with the UK PMI Manufacturing numbers released earlier this week the overall trend for the UK economy seems to be more positive. The numbers have not ended fears of a continued economic slowdown in the United Kingdom and some analysts are still expecting the Bank of England to announce an increase in its asset purchase programme next week, which is likely to keep the Pound in check and limit any further gains. The third of the UK’s economic activity indices is being released today in the form of the PMI services index; the Pound is maintaining its upward bias ahead of the release as market participants are seeing the data as another potential positive for Sterling. The service sector data has been forecast to come out slightly lower at 53.5 versus the previous 54.0 release but as with the construction figures should still point to expansion in the economy. 

In addition to the positive data Sterling saw further support against the Dollar coming from increased volatility in the Euro. Comments made by Chinese Premier Wen suggesting China was considering greater involvement in the EFSF and ESM European stability funds triggered a sharp appreciation of the Euro yesterday morning. The Premier went on to say that China was still researching how to participate and that it was very important for the EU to rely on itself to resolve the Euro debt crisis, the single currency ultimately retraced quickly as hopes of immediate support for Europe faded.

A lacklustre result from the 4 & 5-years Spain bond auction added pressure to the Euro as well, bond yields fell and demand was stable but the results suggested to many that the momentum generated by the European Central Bank’s long-term refinancing operations in December was fading. EU PPI inflation figures showed an easing of price pressures as the December figures came out at 4.3% y/y, down from the previous months 5.4% and in line with analysts’ expectations. German PMI services figures have kept the Euro extending its early morning gains slightly; service sector activity fell slightly to 53.7 from 54.5 in January but remained in expansion territory. EU retail sales numbers are expected to be released later this morning.

The Dollar showed a slow recovery trend of the news regarding China’s potential involvement in Europe and the release of better than expected weekly jobless claims ahead of Fed Chairman Bernanke’s testimony before Congress kept the Dollar trending higher. US initial jobless claims fell to 367K from 379K on a weekly basis. The Dollar weakened during late European trading after the Fed Chairman’s testimony to Congress on the US economy was perceived more bullish than expected, increasing risk appetite. Bernanke said that he was seeing sign that the uncertainty that had been dampening investment in the US due to the EU crisis was diminishing.

The main focus for the market will initially be on the German and UK PMI services numbers before switching to the US non-farm payrolls figures scheduled to be released this afternoon. The number of new jobs created is forecast to be lower than the previous month but economist will be more interested to see with the positive trend in employment remains intact. The US ISM non-manufacturing index will be released later in the day along with durable goods order to round out the week.