Euro, Pound, Yen All Consolidate in Quiet Trade

• JPY continues to test 120.50 to the downside
• EUR PMI slips a bit but internals continues to show strength
• GBP PMI surprises to the upside
• USD ISM Manufacturing and Consumer Spending on tap

A very quiet night of trade as FX markets continued to digest the implications of yesterday’s FOMC communiqué (which essentially stated that the Fed will remain on hold for the time being) and braced themselves for the torrent of US economic data in the next two days. On the overnight calendar the only release of note was the EZ PMI numbers which printed slightly below expectations at 55.5 vs. 56.2 reflecting weaker output – a sign that stronger euro is clearly producing a headwind for EZ manufacturers. The news tonight only adds to speculation that EZ officials will press for a more aggressive rebalancing of exchange rates, especially vis a vis the yen at the upcoming G-7 meeting. Indeed the USD/JPY continued to plumb the lower end of its range tonight as traders feared further waves of carry trade liquidation. Overall, however, the EZ PMI data continued to suggest that expansion in the region remains in good shape with both price and labor components on the release inching up. In short there was nothing in the data that would compel the ECB to change its hawkish posture and therefore a 25bp hike in March still appears the most likely policy choice.
Yesterday’s strong US GDP reading caught many analysts by surprise, but price action in the EURUSD did not reflect the fundamentally positive news. The counter move was partly caused by the unexpected slip in Chicago PMI below the 50 boom/bust level for the first time since 2003, but also by general market skepticism towards the sustainability of such strong US growth. As many analysts have pointed out, the overwhelming majority of the US GDP gain was driven by consumer spending which may have been skewed by the combination of highly unusual warm temperatures in November and December and the rapid collapse of energy prices. With oil now climbing back above $57/bbl while temperatures in US revert to seasonal sub-freezing levels the question remains as to whether these spending patterns will hold. Today’s US personal income and personal spending figures should provide some answers.