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The Euro spiked higher after German PMI figures showed the region's largest economy experienced growth in its service sector. The PMI reading jumped to 54.1 from 48.1 which obliterated forecasts of 48.6. The print came on the heels of the French manufacturing PMI crossing the wires in expansion territory at 50.2.

Talking Points
• Japanese Yen: Under Pressure As Risk Appetite Continues
• Pound: Reversed On Positive European Data
• Euro: German Services and French Manufacturing Expand
• US Dollar: Bernanke to Speak Today

Euro Surges As German and French PMI readings Cross into Expansion


The Euro spiked higher after German PMI figures showed the region's largest economy experienced growth in its service sector. The PMI reading jumped to 54.1 from 48.1 which obliterated forecasts of 48.6. The print came on the heels of the French manufacturing PMI crossing the wires in expansion territory at 50.2. German manufacturing and French services also advanced which helped raise the composite Euro-Zone PMI to 50.0 as the region is on the brink of expansion.

The strength in both sectors validates the growth that France and Germany saw in the second quarter and provided evidence that it will be sustainable despite expectations from economists. There has been a prevailing view that the weakness in the rest of the region would limit the upside potential for its largest economies but the broader reading demonstrates that this may not be the case. Yet, forecasts remain that the ECB will keep rates on hold beyond the second half of 2010, despite the central bank being poised to tighten policy as soon as it is justified. Equity markets are looking to finish the week on a positive note which could also lend support for the single currency. However, if we see the expected light volume day lead to profit taking then a pullback in the Euro is a possibility.

The pound is being dragged higher by the increasing optimism after reaching as low as 1.6433 during Asian trading on waning risk appetite. It was reported that Chinese regulators are considering new rules that would tighten capital requirements and slow lending which has surged. An empty economic calendar has left sterling price action in the hands of the broader themes which may not be enough to break it from its current range. The GBPUSD continues to be stuck between the 20 and 50-Day SMA's at 1.6466 and 1.6592 respectively.

The dollar has reversed earlier gains and come under pressure after strong European manufacturing and service figures punched a hole in the argument that the U.S. will be the first to emerge from the recession. An expected rise in existing home sales today to 5.0 from 4.89 million could add to dollar weakness if it fuels risk appetite. However, we are only seeing U.S. futures and European equity markets slightly in positive territory as risk sentiment could be playing a secondary role in greenback price action. Fed chairman Ben Bernanke will speak today at the Jackson Hole conference and if he presents a brighter outlook for the U.S. economy it could provide dollar support as it may raise interest rate expectations. However, don't expect the central bank leader to talk specifically about interest rate policy which could limit the impact of his remarks.

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To discuss this report contact John Rivera, Currency Analyst: jrivera@fxcm.com