Talking Points

  • Japanese Yen: Threatening Support at 89.90
  • Pound: Service Sector Shows Improvement
  • Euro: Service PMI and Retails Sales Weakens
  • US Dollar: Employment and Service Sector Data On Tap

Euro Stumbles On Weak Service Sector Data, But Upside Potential Remains On Risk Appetite

The Euro stumbled after reaching as high as 1.3070 dropping a 100 bps down to 1.2920. The Euro-zone PMI service final reading for January slipped to 45.2 from the preliminary print of 45.5. Germany and France both saw their individual gauges revised lower which dragged on the overall index, which contracted for an eighth straight month. Meanwhile, retail sales in the region were flat for December which beat expectations of a –0.2% decline. However, the year-over-year reading fell 1.6% which was greater than the –1.4% forecasted. The lack of domestic growth will remain a weighing factor on the economy and the service sector and may prolong the current recession.

The euro/dollar has been strongly correlated with equity markets and despite the brief break due to fundamentals overnight we expect that relationship to hold. Therefore, if risk appetite continues to increase then we may see the pair look to re-test 1.3000 with a run at the 20-day SMA at 1.3980. However, upside potential may be limited with a pending ECB rate decision tomorrow. Although expectations are that the central bank will keep rates on hold, falling inflation and a deepening recession could force President Trichet to continue the current easing policy.

U.K. fundamental data continues to improve as the service PMI added to an improving outlook with a print of 42.5 after 40.2 the month prior. The small signs that the U.K. economy may be bottoming could give the BoE reason to pause its easing policy. Expectations are that the central bank will cut rates by 50 bps tomorrow. However, if Governor King signals that they may have reached an end to their easing cycle then we could see the pound continue to gain. The pound/dollar has bounce from its overnight low of 1.4330 and is now looking to test the high of 1.4460.

The dollar could remain under pressure as risk appetite continues to increase. Although, traders remain cautious equity markets the expectations that a stimulus package will ultimately pass through the Senate has fueled bullish sentiment. Today's economic calendar may threaten that optimism as the ISM non-manufacturing gauge is expected to show further contraction to 39.0 from 40.1in the sector that accounts for 70% of GDP. Additionally, the ADP employment report is expected to show the economy lost over 500,000 jn January. The report which has been reconfigured too more closely reflect the NFP report due Friday and may provide major event risk for the dollar.