Pound Finds Support On Improving Service PMI Reading, Will U.S. NFP's Sink Optimism A

DailyFx · April 3, 2009, 6:50am

The Pound rallied nearly 200 pips during European trading to a seven week high of 1.4831 as the U.K. service PMI gauge added to the trend of improving fundamental data for the economy. The reading for the sector that accounts for 70% of the country’s GDP rose to 45.5 from 43.5 which was the fourth straight improvement.

[B]Talking Points
• Japanese Yen: Finding Resistance at 100.00
• Pound: Service PMI Rises to Highest In Six Months
• Euro: Will ECB Ease Rates Further?
• US Dollar: NFP’s and ISM Non-manufacturing On Tap
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Pound Finds Support On Improving Service PMI Reading, Will U.S. NFP’s Sink Optimism And Reverse Gains?[/U][/B]

The Pound rallied nearly 200 pips during European trading to a seven week high of 1.4831 as the U.K. service PMI gauge added to the trend of improving fundamental data for the economy. The reading for the sector that accounts for 70% of the country’s GDP rose to 45.5 from 43.5 which was the fourth straight improvement. We may start to se the outlook for the U.K. economy significantly improve as the U.K. has started to successfully buy Gilts in the market place after their initial efforts were met with a luke warm response. Loosening credit markets will help boost consumer lending which may help bring a bottom the sinking housing market. However, Sterling has started to give back some of its gains as the U.S. employment report nears and is expected to dampen optimism.

The Euro has started to find support after falling to as low as 1.3397 as equity markets have started to trade higher after starting the day on a flat note. An upward revision to the final service PMI reading 40.9 from 40.1 for the region has improved the outlook for the economy and fueled risk appetite. Yesterday we saw the single currency shoot to as high as 1.3516 when the ECB cut rates by a less than expected 25 bps. However, post release comments from President Trichet that the 1.25% benchmark rate wasn’t the lowest possible opened the door for more easing. Although, he hinted that they may pause at their next policy meeting, he did foreshadow that a decision on quantitative easing efforts may come at that time. However, he still maintained that the central bank will achieve its medium-term objective, to keep inflation below but near 2%.However, that argument took a blow today as German import prices in February fell by 6.4% on an annualized basis, which was the most in ten years. Also adding to global deflation argument was Swiss CPI dropping to the lowest level since 1959 at -0.4%.Therefore, we may see markets start o price in the off balance sheet efforts and further easing which could lead the euro lower over the near-term.

The USD/JPY has come under pressure after the pair re-tested the 100.00 price level for a second time. We are starting to see the pair trade more along its traditional roots with a positive correlation to risk appetite. We may be seeing the increase demand for higher yielding assets return the Yen’s status as a funding currency, making it more susceptible to carry trade flows. In recent months the dollar’s status as the safe haven currency of choice had negated this relationship. Although, we may see the dollar hold this status for some time, it is prudent to watch this relationship as markets start to stabilize.

After finding some support during Asian trading the dollar found itself under pressure as Europe saw improving fundamental data which fueled optimism. Yet, the upcoming Non-farm payroll report is expected to show the U.S. economy lost another 660,000 jobs in March, which would be the fourth straight above 600,000. Additionally, the unemployment rate is expected to rise to 8.5% from 8.1% in February which could dampen sentiment and add greenback support. However, the ISM Non-manufacturing report will follow shortly thereafter and if the gauge of the service sector can show a significant improvement matching the manufacturing reading then we could see risk appetite resume. Economists are forecasting a slight uptick to 42.0 from 41.6; therefore we would look for a print above 45.00 as a dollar negative. Fed Chairman Ben Bernanke is also speaking today at a conference in Charlotte today which could also present event risk if the central bank leader signals that quantitative measures are working or failing.

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