Euro and Pound Falter As Week Opens

Talking Points

· NZD Labor costs higher
· EUR PMI Services better than expected
· GBP UK Services below forecast
· USD ISM Non Manufacturing

The EURUSD continued its decline from Friday’s post NFP highs despite the unexpected rise in EZ PMI Services readings to 57.9 from 57.2 themonth prior. The GBPUSD got dented as well by below forecast results from January CIPS PMI report which printed at 59.2 versus consensus calls of 60.6. The weakness in the euro was not driven by any fundamental factors, but rather by the massive blow to traders expectations after Friday’s report by MNI news suggested that the ECB will halt it monetary tightening campaign after making one final hike to 3.75% in March. For a market so strongly focused on the compression of interest rate differentials between the euro and the greenback, Friday’s news release, though unsubstantiated, shook the underlying foundation of the euro bull’s case as bids for the unit continued to evaporate throughout the night.

Whether, the MNI report is true or not remains to be seen. However, it makes this Thursday’s ECB rate announcement and press conference all that more important. While no one expects the ECB to raise rates at the February meeting, traders will pay very careful attention to Mr. Trichet’s rhetoric to determine if there is any change in the central banks hawkish posture towards the long term direction of EZ monetary policy.

Meanwhile, UK’s CIPS Services PMI printed slightly weaker sending cable through the 1.9600 figure. Both employment and new business components slipped while input and output prices ratcheted higher. Overall the data suggests that services demand remains relatively robust but underlying inflationary pressures persist. In short, this combination appears to be a recipe for further BoE rate hikes. Nevertheless the market does not believe that BoE will make any tightening moves in the immediate future. Over the week-end there was some speculation in the press that BoE may produce yet another surprise rate hike at the MPC meeting this week, but given the fact that the last vote to hike was passed by a razor thing margin of 5-4 the chances of another rate hike this month are remote