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Mixed start for forex markets

Economic data are driving forex markets this morning. After a bout of strength at the start of the European session, the dollar has come off with EURUSD and GBPUSD back at their 1.3850 and 1.6300 highs respectively. This comes after some extremely positive data releases this morning. Germany remains the powerhouse of Europe and is defying the threat of a global economic slowdown. Its unemployment rate fell by 52,000 in February; the market was looking for a more moderate fall of 18,000, which helped push the overall unemployment rate down to 7.3 per cent. This is a multi-decade low and is driving the single currency higher.

Overall data for the Eurozone was also impressive. The manufacturing sentiment data rose to an 11-year high. Encouragingly, there was an improvement to the peripheral countries' PMIs. Ireland and Italy saw decent gains in their indices along with Spain, and all are in expansion territory above 50. The unemployment rate also fell to 9.9 per cent, led by the improvement in Germany. CPI was also at 2.4 per cent, a 2.5 year high, in February, which should support the euro. The ECB meets later this week and price pressures should ensure that Trichet is fairly hawkish in his press conference, even if he falls short of laying the ground for an exit strategy as core inflation remains low by historical standards.

Sterling has surged above 1.6300 this morning on the back of the latest PMI Manufacturing release for February. The manufacturing sector in the UK is powering ahead in the first quarter of the year, and the PMI index remained at a record 61.50. Part of this surge is due to pent up demand from the end of 2010 when bad weather disrupted production, but it also suggests that the UK economy is showing signs of re-balancing away from consumption. This may also help Q1 GDP data, although the services sector is such a large part of the UK economy (roughly 70 per cent) that its performance has a stronger bearing on growth.

Rising commodity prices also threaten the global manufacturing recovery. Interestingly, China's manufacturing PMI index has already started to moderate, and it fell further in February to 52.2 from 52.9 in January due to the continuing effects of PBOC tightening. China's manufacturing sector seems to peak before the West, which suggests indices in US, Europe and the UK are getting toppy and inflation pressures persist they could hit business.

The news-flow out of the Middle East has moderated this morning allowing the yen to weaken somewhat as investors move back into risky assets. However USDCHF is failing to make much headway above 0.9300 after some strong GDP data for Switzerland. The Swiss economy expanded by an impressive 3.1 per cent in 2010, above the 2.7 per cent expected by the market. This is likely to keep the Swiss National Bank (SNB) on guard for rising inflationary pressures, although the strong franc should limit price pressures for now. Stocks are also higher, continuing yesterday's strong performance. However, gold is also rising and Brent crude oil is also supported above $112 per barrel.

Ahead today UIS ISM manufacturing data and Fed Governor Ben Bernanke's Humphrey Hawkins testimony to the US Senate will dominate. It seems likely that Bernanke will disappoint anyone looking for a signal from the Fed that it will change its policy course and reverse QE2 anytime soon. Bernanke is likely to state that core inflation (minus energy) remains moderate while unemployment is still elevated. This could weigh on the dollar later today and tomorrow when Bernanke makes a near identical speech to the House of Representatives.

Data watch:
Canada 14:00 GMT (0900 ET) BoC Rate % n/a 1.00% 1.00%
United States 15:00 GMT (1000ET) Fed's Bernanke Testifies
United States 15:00 GMT (1000 ET) ISM Manufacturing (Feb) index n/a 60.8 last, exp 61.0

Best Regards,
Kathleen Brooks| Research Director UK EMEA | FOREX.com
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