Based on the price action in the foreign exchange market this morning, FX traders are starting to become immune to weaker U.S. data. Nearly every U.S. economic report released over the past month has been distorted by the brutal winter weather. Temperatures will rise eventually and economic data will normalize but we still have at least another month worth of softer economic data ahead.

The news that manufacturing activity in the Philadelphia region contracted at its fastest pace in 12 months sent the dollar tumbling against the Japanese Yen but losses in USD/JPY and U.S. equities were short lived as buyers swooped back in looking forward to the end of winter. The glass half full view of the economy was supported by a separate survey from Markit Economics that found manufacturing conditions improving significantly in the month of February and while we are skeptical of this strength, it provides hope that it won’t be long before the U.S. economy regains momentum. The other economic reports release today was in line with expectations – consumer prices rose 0.1%, jobless claims dropped to 336k from 339k and leading indicators rose 0.3%.

The Philly Fed survey did very little damage to the U.S. dollar this morning with the greenback quietly consolidating against other major currencies. For the time being we expect the 101.50-103 range in USD/JPY to remain intact and EUR/USD to hold below 1.3800. The increasingly narrow range in USD/JPY points to an imminent breakout but with no major U.S. economic reports scheduled for release on Friday, we can’t see a breakout occurring within the next 24 hours. While USD/JPY is struggling to rally, if investors continue to price in or discount weaker U.S. data, the currency pair could crack above 103 on the first sign of significant strength. In the meantime FX traders should keep an eye on Treasuries and equities. If yields continue to rise and stocks extend higher USD/JPY could hit its monthly high of 102.75.

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