EUR / USD
The dollar overall pushed to three-week highs on Monday as European currencies came under pressure with the Euro sliding to the lowest level sine early February against the US currency despite an advance against Sterling. Euro-zone flash PMI manufacturing data for February was weaker than expected with a decline to 51.0 from 52.3 previously and the lowest reading for 12 months while the services-sector data also came in below expectations at 53.0 from 53.6. There will be particular concerns over renewed downward pressure on prices which fell at the sharpest pace since 2013 and there was also a weak reading for supplier-delivery times which will maintain pressure for further ECB action next month. There were concerns that the UK referendum could also damage confidence in the Euro-zone which tended to hamper the Euro. With generally firmer risk appetite curbing any potential defensive Euro demand, it dipped to lows just above 1.1000. The Markit US PMI manufacturing index retreated to 51.0 from 52.4 in January which was the lowest reading since 2012 and there was also a sharp drop in prices, maintaining concerns surrounding the manufacturing sector and curbing fresh dollar support. The Euro was able to find support close to the 1.1000 level without making a significant recovery. Tuesday’s US consumer confidence and home sales data could have an impact on Fed expectations as the Euro continued to hold above 1.1000 with less favourable risk conditions having some limited net positive impact.
Defensive yen support was undermined by gains in global equity markets during Monday, although the currency was still broadly resilient and strengthened to two-year highs against Sterling. Although the dollar drew support from rising US yields, the positive impact was offset by a weaker PMI manufacturing reading. The dollar faltered ahead of the 113.50 area. The Japanese Finance Ministry would find it politically very difficult to intervene ahead of the G20 meetings later this week and this may encourage some renewed yen buying, especially with the US Treasury warning against currency misalignments. There was a fresh deterioration in risk appetite on Tuesday with a weaker Chinese yuan fixing and decline in equity markets unsettling sentiment again. There was caution ahead of the G20 meetings later in the week and, after failing short of the 113.50 area in New York, the dollar dipped to lows just below 112.00 before finding some relief.
Sterling was subjected to renewed selling during the European session on Monday with a retreat to lows near 0.7850 against the Euro and even sharper declines against the dollar with a brief decline to fresh seven-year lows just above 1.4050. There were further concerns that London Mayor Boris Johnson’s decision to back an EU exit would significantly increase the risks of Brexit. There were also concerns over the risk of a destabilising impact from a long campaign. There was a sharp rise in the cost of hedging against Sterling weakness and implied volatilities also rose further. Ratings agencies expressed concerns over the impact of any decision to leave the EU with Fitch making reference to the risk of punitive exit terms. There was a generally weak reading for the CBI industrial survey which dampened economic confidence. Testimony from Bank of England officials including Governor Carney will be watched very closely on Tuesday for hints on monetary policy. Officials will be very reluctant to make specific comments on the referendum, but remarks will be watched very closely. There was a partial Sterling recovery from over-sold conditions late in Europe with a move back above 1.4100.
The Euro again found support just below 1.1000 against the franc on Monday with the significant bid interest just below this level again sparking speculation over possible National Bank intervention. The dollar maintained a firm tone and challenged resistance around the parity level before dipping lower as risk conditions deteriorate again. There were further concerns surrounding EU politics as the UK referendum dominated headlines and this will tend to provide some underlying franc support with concerns that that overseas investors will potentially pull away from the Euro area.