The dollar rallies across the board after dismal Euro zone services industries data fuels speculation that the much anticipated slowdown in the 15-country area is taking a toll on business sentiment and may cause the European Central Bank (ECB) to rethink its persistently hawkish rhetoric. Friday’s short squeeze in euro long positions in the face of a negative U.S. payrolls and today’s accelerating losses in the single currency are tipping the flows in favor of an already improving dollar momentum, which could further gain strength after this morning’s scheduled release of the U.S. services ISM.
Euro zone services PMI hit a four-and-a-half-year low at 50.6 in January from 52.0, undershooting expectations of a 52.0. The situation appeared worse for the individual nations as the PMI fell below 50 in Germany, Italy and Spain, suggesting a contraction in the sector. The other piece of bad news was the 0.1% decline in December Euro zone retail sales, the third consecutive decrease, and the lowest level in the 11-year history of the series.
EUR/USD declines by nearly 2¢ reaching the 50-day moving average of 1.4660, which is also the 50% retracement of the rise from the 1.4364 low to last week’s 14954 high. A breach below 1.4640 is seen stabilizing at 1.46 for now. Rebound potential seen limited at 1.47, which is partly in function of the performance of this morning’s ISM.
Two surprises in one
The U.S. services ISM due for release at 10 am EST came out one hour earlier “on possible breach of information,” according to the website of the Institute of Supply Management.
The second surprise is that the ISM tumbled to 41.9 in January from 54.4, reaching its worst showing since October 2001. Note that the January Philly Fed survey had also tumbled to the lowest level since October 2001 at -21. Today’s ISM release is accompanied by a plunge across the board; new orders at 43.5 from 53.9, employment at 43.9 from 51.8.
The main reason to the divergence between the rebound in the manufacturing ISM (released on Friday) and today’s dismal services ISM is the exports component in manufacturing, seen in the 6-point jump in the exports orders component to 58.5, which contributed in lifting the overall manufacturing index. Exports orders along with the fourth consecutive monthly increase in manufacturing orders reflects the emerging benefits of the weak dollar to U.S. exports.
While today’s report is the second major confirmation that the U.S. economy is in recession, the U.S. dollar remains little fazed on the premise that the U.S. slowdown is less likely to be isolated, following the release of the Euro zone services PMI, which hit four-and-a-half year lows. Renewed declines in equities are expected to drag down risk appetite, which should further weigh on the high yielding currencies against the dollar, leaving USD/JPY as the main dollar pair under pressure.
Aussie boosted ahead of rate hike
Last night’s RBA’s rate hike to a 12-year high of 7.00% has failed to sustain gains in the Aussie after the currency made few attempts in testing the 91¢ figure only to reverse those gains and drop back towards the 90¢ figure amid broadening gains in the U.S. dollar.
Although the central bank expressed concern with mounting inflationary pressures, markets do not expect the central bank to deliver a back to back tightening during lingering market uncertainty.
But the turnaround in the euro is leading a broad sell-off in most currencies against the USD, pushing AUD/USD towards 90¢. Support is seen emerging at 89.70, with resistance imposing pressure at 90.40.
USD/JPY may be limited by stocks
Although we’re seeing a broad dollar rally, highlighted by a sell off in gold below $900 per ounce, we expect USD/JPY to stabilize gains at 107.70 and be dragged towards the 107.20s amid a gradual reduction in risk appetite. The S&P 500’s inability to close recover above the 1390 should be further highlighted today and turn into further selling towards 1.330. Key foundation stands at 106.70.
Sterling eyes $1.96
Despite a pick up in the UK’s services industry index to 52.5 in January from 52.4, sterling joins the rest of currencies in tumbling against the greenback, eyeing preliminary support at $1.9640. Downside bias to remain ahead of Thursday’s Bank of England decision, which we expect to produce a 25 bp rate cut to 5.25% despite lingering price pressures across services and manufacturing.
Sterling’s daily chart suggests a retest of the 1.96 figure en route to 1.9570 on Thursday. Upside capped at 1.9720.
GBP/JPY seen extending losses towards 211.00, followed by the 210.50 target in the event of prolonged losses in U.S. equities.
Ashraf Laidi
Chief FX Strategist
CMC Markets US
a.laidi@cmcmarkets.com
