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Euro weakens after governing council discusses QE


The dollar rose on Thursday, propped up by an increase in risk appetite after stocks fell, following the release of poor data. ISM Non-Manufacturing Composite increased to 53.1, but not as much as the 53.5 expected. Jobless Claims rose to 326k versus 317k expected, Continuing Claims rose to 2850k, undershooting expectations. The Trade Balance fell to -42bn versus -38.5bn expected. Tomorrow sees the release of Non-Farm Payrolls, which are expected to show a rise to 200k in March and will be the first test of whether the bad weather really could be blamed for the weak data during the winter.


The euro fell on Thursday after doveish commentary from the President of the ECB Mario Draghi at the post ECB rate meeting press-conference. Nevertheless, the governing council decided to keep policy unchanged, maintaining the main refinancing rate at 0.25% and the Marginal Lending Facility at 0.75% as expected on balance. One of the things which weakened the euro was that Draghi admitted that QE had been discussed in-depth during the meeting – which contrasted to the previous meeting where it was not discussed at all. There also seemed to be less unanimity within the council, with some members keen to implement stimulus whilst others happy to continue to wait-and-see. Draghi said one potential threat was that the longer that inflation remained low the more potential there was for deflation setting in. He said overall the governing council had voted to keep policy unchanged because medium-term expectations had not changed substantially to alter the outlook. Other data out on Thursday showed Services PMI dipping to 52.2 from 52.4 previously, and Retail Sales rising by 0.8% y/y in February when 0.7% had been expected.


The pound unwound on Thursday after data showed a deeper-than-expected fall in Services PMI, which came out at 57.6 from 58.2 expected. The Services sector is the largest in the U.K – by far – so the data may have impacted on the economic outlook, although the currency still has some of the most robust fundamentals in the G7. Other data showed the Composite PMI in March also falling to 57.6 when a 58.1 result had been expected. Sterling rose yesterday despite Construction PMI undershooting forecasts and lower-than-anticipated house price data, however, traders could not turn a blind eye to a second day of lacklustre figures on Thursday.


The yen strengthened overall on Thursday after safe-haven flows increased following a rise in risk aversion due to poor economic data in the U.S and Europe. The yen was also supported by positive data at home, after Japanese Services PMI rose to 52.2 in March from 49.3 previously. The increase above 50 signalled a change from environment in which the sector was contracting (below 50), to one in which is was growing, (above 50). The Composite PMI also rose to 52.8 from 52.0 previously. Other data showed the amount of Japanese and foreign financial assets traded by Japanese and foreign investors. Foreign investors sold more Japanese assets in the week ending March 28th, dumping -515bn yen worth of stocks and -763bn of bonds – no doubt in anticipation of the negative effects of the sales tax pump. Japanese investors also bought less foreign bonds, although purchases of foreign stocks by them rose by 31.3bn.

Friday, 04 Apr, 2014 / 9:37

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