The EURUSD tumbled more than 100 points in active overnight trade as a key gauge of service activity in the Euro zone registered its worst reading in more than 4 years suggesting that the economic slowdown may be spreading its way across the Atlantic.
â€¢ Japanese Yen: rises above 107.50 on importer demand and carry flows
â€¢ Euro: PMI Services worst in 4 years
â€¢ British Pound: PMI Services better but cut still likely
â€¢ US Dollar: ISM Services on tap
The EURUSD tumbled more than 100 points in active overnight trade as a key gauge of service activity in the Euro zone registered its worst reading in more than 4 years suggesting that the economic slowdown may be spreading its way across the Atlantic. The PMI Services survey slipped to 50.6 from 52.0 expected while the German component of the index actually broke below the 50 boom/bust level printing at 49.4.
The sharp drop in PMI played straight into the hands of the euro bears, supporting their argument that the ECB will not be able to remain hawkish much longer and will have to follow the Fed by lowering rates relatively soon. It remains to be seen if Mr. Trichet will maintain his hawkish posture at this Thursdayâ€™s ECB press conference given tonightâ€™s troubling data. If he does hint that the downside risks have increased, the EURUSD could come in for more selling as traders begin to discount possible future ECB rate cuts that would quickly eliminate euroâ€™s interest rate advantage over the dollar.
However, we remain skeptical that Mr. Trichet will change his course so soon, preferring instead to remain stationary for the time being. The ECB tends to be more deliberative that the Fed and will likely require several more data points to be convinced of the need for a more accommodative monetary policy. Furthermore, the ECB policymakers may decide that the recent decline in the EURUSD may be simulative enough to the export centric region.
In the meantime, news out of the UK was considerably more positive as PMI Services beat forecasts coming in at 52.5 versus 52.0 projected. The latest results, however, are unlikely to persuade UK monetary authorities to remain stationary, with most of the market participants forecasting a 25bp cut this Thursday. Nevertheless, after been pummeled by shorts for the better part of the past two months over fears that a 50bp cut was imminent, cable may actually see a relief rally ever if the BoE lowers rates by only 25bp.
Finally, in contrast to the rest of the G-10 universe, Australia increased its rates to 7.00% making the Aussie one of the highest yielding currencies in the industrialized world. The unit showed relative strength as the result of the move with AUDJPY gaining 100 points off the lows.
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To discuss this article please contact Boris Schlossberg, Senior Curency Strategist: [email protected]