Better than expected final EZ PMI services report and the announcement that BOJ Governor Masaaki Shirakawa will step down on March 19, helped reverse risk flows in early European session after a steep sell off in Asia that saw EUR/USD drop to 1.3457 and USD/JPY probe the 92.00 figure. The EUR/USD rebounded to 1.3540 regaining nearly 90 points after the EZ final PMI services reading came in at 48.6 versus 48.3.

The Services sector remains in contractionary territory but has improved for the third month in a row after hitting bottom at 46.00 in November. The news helped to stabilize yields in the periphery as investors once again breathed a sigh of relief that the economy in the EZ continues to improve. Although the region has managed to stabilize its financial sector, the key to any further gains in the EUR/USD will now depend on economic growth and today’s data provided a modicum of proof that economic activity in the 16 member union is beginning to pick up.

Meanwhile the announcement that Mr. Shirakawa is leaving a bit earlier than expected, spurred a fresh round of buying in USD/JPY. Mr. Shirakawa was viewed as a reluctant participant in Prime Minister Abe’s plan to reflate the Japanese economy and sharply weaken the yen. His departure will now pave the way for a more accommodating monetary policy and perhaps fuel the rise in USD/JPY towards the 95.00 level as the markets continue to respond to Mr. Abe’s policy changes.

The EURUSD now targets the 1.3550 level while USD/JPY seeks to make a fresh run at the 93.17 yearly highs as investors hope that the risk rally continues into North American trade.

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