EUR/USD Probes 1.10 – Dollar Rally Done?

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Market Drivers March 24, 2015

Better EZ PMI suggest EU is recovering
Nikkei -0.21% Europe .11%
Oil $47/bbl
Gold $1190/oz.

Europe and Asia:
EUR EZ Flash PMI 51.9 vs. 51.6
EUR EZ Flash PMI Svc 54.3 vs. 53.9

North America:
USD CPI 8:30

USD New Home Sales 10:00

Better PMI data out of Europe helped power the euro towards the key 1.1000 level in morning European dealing today, but once there, the pair was met with heavy selling and retreated from those levels towards the 1.0950 support.

Last Friday we noted that, “The only way that EUR/USD resumes its creep towards parity would be if EZ economic data began to deteriorate once again which is why next week’s flash PMI readings could prove crucial to the near term price action in the unit. A better than expected reading in EZ PMIs would provide investors with confidence that ECB’s QE program is starting to work and could propel the pair towards a retest of the recent 1.1000 highs.”

Today PMI readings suggest that this dynamic may now be taking shape. Although the data was not unambiguously positive – with French Manufacturing sector still mired in sub 50 territory, the overall gauge of economic activity in the region showed improvement. The composite PMI rose to 54.1 from 53.6 with services especially rising strongly to 54.3 from 53.9. With the euro considerably cheaper than last year, tourism in Europe is likely to pick up significantly and that should help drive growth in the services sector through the summer season.

Meanwhile in UK the eco news was not nearly as favorable to the pound as UK CPI data showed that inflation in February literally registered 0% growth. The news suggests that price pressures in UK remain non existent for the time being leaving BOE on hold for the foreseeable future. Cable tumbled to below 1.4900 in the aftermath of release as traders pared any expectation of rate hikes to 2016.

Inflation will be a key focus in US session as well with CPI data due at 12:30 GMT. The markets are looking for rebound to 0.2% from -0.7% the month prior, but if the readings are subdued just as they are in UK, the dollar could see more profit taking as markets begin to shift their rate hike expectations on this side of the Atlantic as well.

Indeed today’s one-two punch combination of better than expected EZ PMI data and weaker US CPI readings could create a perfect setup for a short covering squeeze that could take EUR/USD through 1.1000 and beyond as the seemingly invincible dollar rally looks less and less certain.

Boris Schlossberg
Managing Director

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