Forex: Euro Gains May Prove Short-Lived After Improved PMI Data

Talking Points:

Euro May Not Find Lasting Support in Upbeat Headline PMI Result
Aussie Dollar Sold as Soft Chinese PMI Data Weighs on RBA Outlook
Japanese Yen Outperforms as Nikkei Drop Fuels Safe-Haven Demand

The preliminary set of January’s Eurozone PMI figures headlines the economic calendar in European hours. The region-wide aggregate index is expected to show manufacturing- and service-sector growth accelerated in January, with activity expanding at the fastest pace since June 2011. An upbeat result may not necessarily translate into lasting Euro strength however as traders what the outcome means for ECB monetary policy prospects.

December’s PMI datahighlighted the quandary facing the central bank: while overall growth picked up, pricing trends remained dismal. The ECB is mandated to focus exclusively on price stability. That means improving output dynamics are no more a reason to abandon today’s dovish posture than dismal performance had been a stimulus trigger as the region struggled with double-dip recession last year.

On balance, that suggests an initial Euro rally in the wake of a supportive headline reading may prove short-lived as traders pick apart the report’s details for signs of lingering deflation threats. If the trend in pricing activity continues to disappoint, selling pressure my swiftly emerge to punish the single currency as ECB easing bets build out. We remain short EUR/USD.

The Australian Dollar underperformed in overnight trade after disappointing Chinese PMI data weighed against RBA policy expectations. The report likewise undermined Asian stock performance amid worries about performance in the region’s largest economy, pushing down the benchmark Nikkei 225 index and boosting haven demand for the Japanese Yen.

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