Euro May Rise as PMI Data Overshadows Cyprus Jitters

The Euro may rise as an improvement in March PMI data overshadows Cyprus-linked jitters while policymakers plot the next steps forward.

Talking Points

Euro May Rise as PMIs Edge Higher while Cyprus, Italy Fears Simmer
Pound Unlikely to Find Lasting Support in Improved Retail Sales Data

Preliminary estimates of March Eurozone PMI figures headline the economic calendar in European hours. The region-wide metric composite gauge is set to show that the pace of contraction in manufacturing- and service-sector activity moderated from the prior month. German PMIs are forecast to continue outperforming, with factory-sector activity seen growing at the fastest pace in 14 months. Meanwhile, German services are due to expand at a pace just a hair softer than the recent peak set in January, which marked the strongest performance since mid-2011.

On balance, this bodes well for the Euro. While the single currency continues to face headline risk from Cyprus and Italy, the level of intensity on both fronts has been reduced to a slow simmer as policymakers plot the next steps forward. That amounts to a lack of “new” bad news to maintain downward pressure beyond the negativity that has already found its way into exchange rates. With this in mind, signs of relative improvement on the economic growth front may reinforce the likelihood that the ECB will remain the only central bank in the G10 FX space to be engaged in monetary tightening (via early repayments of 3-year LTRO loans), offering support to the single currency.

Elsewhere on the docket, Spain is due to sell 2015, 2018 and 2023 bonds, with traders watching average yield levels and bid-to-cover readings to gauge regional sovereign risk jitters present in the markets. UK Retail Sales are set to rise 0.6 percent in February, marking the largest increase in nine months. The outcome may offer a modest boost to the British Pound but the currency’s ability to retain upward momentum seems decidedly limited. Chancellor of the Exchequer George Osborne held firm on the need for continued austerity while offering the Bank of England new flexibility to temporarily deviate from its 2 percent inflation target in the 2013 UK budget unveiled yesterday. That suggests monetary policy will be primary stimulus tool deployed to underpin the economy as it slides toward triple-dip recession. Needless to say this bodes ill for Sterling and we continue to hold short GBPUSD.

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