Euro Recovers Losses as Inflation Heats Up

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Top Stories

  • AUD/NZD hits 19 year highs as NZ PM expects rate cut
  • EZ PPI hotter at 1.5%
  • Nikkei drops -2.43% Europe -.80%
  • Oil at $99/bbl
  • Gold trades $1429/oz. last

Overnight Eco

  • AUD HIA New Home Sales m/m 2.5% vs -0.6%
  • AUD GDP q/q 0.7% vs. 0.8%
  • JPY Monetary Base y/y 5.6% vs. 6.4%
  • EUR PPI m/m 1.5% vs. 1.1%
  • GBP Construction PMI 56.5 vs. 53

Event Risk on Tap

  • USD Challenger Job Cuts y/y
  • USD ADP Non-Farm Employment Change expected at
  • CAD RMPI m/m expected at 3.3%
  • CAD IPPI m/m expected at 0.4%

Price Action

  • USD/JPY rallies through 82.00 but can't hold teh level
  • AUD/USD risk aversion takes it below 1.0100 but recovers above in Europe
  • GBP/USD rallies to 1.6290 on better than expected PMI Construction
  • EUR/USD 1.3750 acts as support for now

@import url(/css/cuteeditor.css); A choppy night of trade as risk FX sold off in Asia on the back of increased concerns over the escalating tensions in the Middle East and a broad selloff in equity indices, but found some support in early European trade boosted by better economic data from UK and hotter inflation data from Europe.

UK Construction PMI rose to 56.5 from 53 forecast recording its strongest reading since June of last year indicating that the country's moribund housing sector is showing signs of recovery albeit from low levels. The news supports the bullish thesis that UK economy continues to gather momentum with yesterday's PMI Manufacturing data also beating market forecasts. Cable however, saw only a limited reaction to the news stalling at the 1.6300 level before trading back to 1.6275 I mid-morning London trade.

Having risen nearly 6% since the start of the year, the pound now appears to be overvalued according to some market analysts. Although traders expect a rate hike from the BoE as early as May, the rise in cable may have already priced in the possibility of two additional rate hikes before the year end - a prospect that appears highly unlikely unless UK economic growth picks up markedly. For now the yearly highs of 1.6330 look to contain the upside in cable unless tomorrow's PMI Services data which is forecast to print at 57.2 produces a significant upside surprise.

Meanwhile in Europe the EZ PPI data printed much hotter than expected rising to 1.5% from 1.1% eyed. On a year over basis inflation on the wholesale level rose by 6.1% suggesting that higher energy costs are clearly exerting some pressure on prices. The critical question going forward is whether the sharp rise in PPI will begin to translate into higher CPI readings. Given the buoyant state of the German labor market producers may now feel more emboldened to pass their price increase to consumers - a move that is sure to cause concern for the ECB.

Tomorrow's ECB press conference may shed some light on the central bank's latest thinking, but today's larger than expected rise in PPI clearly ratchets up interest rate hike expectations in the Eurozone. The EUR/USD rose to trade at 1.3800 from its Asian lows of 1.3745 as a result of the data.

In North America the focus will turn to the ADP employment report due at 13:15GMT. Over the past several months the data has been wildly off the mark in predicting the NFP report due on Friday, so the currency market may view today' results with a large dose of skepticism. However, if the ADP report prints widely off the mark, especially to the downside, it could have an impact on early North American trade reviving risk aversion flows if equities continue their slide from yesterday. On the other hand a better than expected reading from the ADP could calm the markets and send risk FX to further gains as the day progresses.

FX Upcoming

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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