Euro Down Below 1.3200 As Dollar Recoups Losses

• JPY Manufacturing slips, retail edges higher
• EUR Labor market tightens, improves confidence
• GBP House prices continue to accelerate, sentiment down
• CHF KOF leading indicator up for first time in 7 months
• USD GDP, New Home Sales, Chicago PMI on tap

The dollar was finally able to recoup some of its losses in the Asian and early European sessions on profit taking and as Chinese equity markets stabilized following yesterday’s 8.8% plunge in the Shanghai Composite index. EURUSD has managed to drop more than 50 points to break below the 1.3200, but price has held on very tightly as economic reports out of the Euro-zone have been quite encouraging. Meanwhile, USDJPY has recovered 100 points from yesterday’s low to 118.50 as the Japanese Yen consolidates following the recent unwinding of carry trades, which has been attributed to a surge in yen short-term money market rates to 0.75% in the domestic interbank unsecured overnight call rate. While USDJPY has plenty of upside potential, with the end of the fiscal year looming on the horizon, repatriation of funds back to Japan still leaves the door open for the pair to fall lower.
Economic news out of the Euro-zone trounced expectations today and capped EURUSD losses around the 1.3200 level. First, the tightening of the German labor market continued for the sixth consecutive month as the unemployment level dropped 79,000, bringing the unemployment rate to 9.3% – the lowest since August 2001. The headline Euro-zone employment rate was equally rosy, as the figure fell to an all-time low of 7.4%. The sharp declines in unemployment figures over the past year have helped to stabilize consumption trends, but it may also be fueling wage demands. Meanwhile, lower oil prices led headline CPI down 0.5% for the month, bringing the annual rate to 1.8% from 1.9%. However, the core measure of CPI rose to a two-year high of 1.7% from 1.5% as second round inflation effects begin to appear. Overall, labor market reports and the core CPI figure keeps the European Central Bank on track to hike rates next week to 3.75%, but the tepid headline results may lead the central bank to pause thereafter until evidence of greater price pressures come to fruition.
In Switzerland, the KOF leading indicator unexpectedly jumped to 1.79 in February while the reading from the month prior was revised up to 1.74 from 1.71. The data capped USDCHF gains just below 1.2250 as this is the first time in seven months that the indicator has actually improved, thus, the reading bodes very well for Swiss growth. Although expansion has clearly slowed over the past six months, the economy is still performing very well as domestic demand picks up some of the slack of the weakening manufacturing sector and should underpin a decision by the Swiss National Bank to raise rates to 2.25% at the quarterly monetary policy meeting next month.
The greenback’s recent gains may be threatened by economic data out of the US today, as Q4 GDP is anticipated to be revised significantly lower while new home sales are estimated to drop off. Traders will also be looking at Chicago PMI – should the index make it back above 50 into expansionary territory, markets will be expecting a rebound in ISM Manufacturing. However, if both reports continue to signal contraction in the sector, dollar bulls could come out in full force in fear of the “R” word.