FX Report 3 February 2016

The Euro was again resilient during Tuesday as the dollar stumbled for any significant traction.  Euro-zone unemployment data overall was better than expected with a decline to 10.4% from 10.5% while the Spanish and German data were also better than expected. The exception to this trend was in Italy where the rate held steady at 11.4%. ECB member Mersch stated that the bank may have to adjust their policy stance with officials again very keen to emphasise that nothing has been decided in advance. The Euro gained some interim support from a deterioration in risk aversion, but was unable to make a challenge on the 1.0950 area and then dipped lower late in the European session, although narrow ranges prevailed as the recent stalemate in the pair continued. There were no major US releases as IBD consumer confidence edged slightly higher. The ADP employment and ISM nonmanufacturing data will be watched closely on Wednesday for further evidence on overall economic trends ahead of Friday’s employment report. Kansas City Fed President George stated that the US Federal Reserve should continue its policy of gradually increasing interest rates with the recent decline in asset prices an inevitable re-adjustment from levels which prevailed at zero interest rates. Markets overall remained doubtful whether the Fed would be in a position to raise rates and the Euro consolidated just above the 1.0900 area with this pattern continuing in early Europe on Wednesday.
JPY  Risk appetite tended to deteriorate again during the US session on Tuesday as oil prices continued to decline sharply while equity markets were also subjected to fresh selling pressure. There was a significant decline in US bond yields which sapped dollar support as 10-year yields declined to 10-month lows below the 1.90% level. This combination of factors pushed the US currency to lows just below 120.00 against the yen as US equities moved lower during the session. Bank of Japan Governor Kuroda stated that he was uneasy surrounding the inflation outlook while expressing confidence that the bank has ample room to expand easing measures if necessary. Although risk appetite remained very fragile, there was an improvement in China’s Caixin PMI services index to a six-month high of 52.4 which provided some relief and the dollar found support below 119.50.
GBP  The UK construction PMI index weakened to a nine-month low of 55.0 for January from 57.8 previously as new business weakened and there were supply-chain difficulties, although the sector was still optimistic surrounding overall 2016 prospects. Despite an initial retreat, Sterling recovered ground against the Euro with support beyond the 0.7600 level and also tested resistance above 1.4400 against the dollar with a test of 3-week highs. Politically, following negotiations with the EU Commission, draft terms for UK re-negotiation of EU membership terms were slightly more favourable than expected. This had some impact in easing immediate fears surrounding a potential vote to leave the EU in the referendum which is likely to take place in June. This improvement in sentiment helped underpin Sterling, although there will still be a high degree of uncertainty, especially as a final deal has still to be completed.  The services-sector PMI data will be watched closely on Wednesday with the Bank of England rate decision and inflation report set for release on Thursday. Sterling was able to maintain a firmer tone and above 1.4400 against the dollar.
Regards All.

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