Euro May Rise on PMIs, Dollar Eyes Claims and House Price Data

Talking Points

• Euro May See Near-Term Bounce as PMI Readings Show Improvement
• US Dollar Has Scope to Advance as Economic Data Remains Supportive
• Australian, NZ Dollars Slump on Unexpectedly Soft Chinese PMI Print
• Kiwi Underperforms After Fourth-Quarter GDP Falls Short of Forecast

The preliminary set of March Eurozone PMI figures headlines the calendar in European trading hours. Expectations call for manufacturing- and service-sector growth to accelerate in France and Germany, but the region-wide composite gauge is expected to show the second consecutive month of contraction (albeit at a slower pace) as sluggish periphery economies continue to weigh against performance in the core of the currency bloc. Broadly speaking, an improvement on the data front may prove supportive for Euro-area yields, offering a bit of a lift to the Euro.

With that in mind, gains are likely to prove limited. Strength at the core of the common currency area coupled with weakness on its southern outer rim is nothing new and has long presented a challenge for the ECB which must craft a unified monetary policy for the region as a whole. This means continued contraction on the overall Eurozone PMI metric will likely take primacy in terms of importance to the interest rate outlook and thereby the path of the exchange rate, capping the upside for the single currency amid lingering recession expectations. A survey of economists polled by Bloomberg expects cumulative Eurozone GDP will shrink 0.4 percent this year.

Later in the day, US House Price Index and Leading Indicators figures enter the spotlight. The former reading is expected to see home prices rise 0.3 percent to the highest level in five months while the latter posts the largest monthly increase since March 2011 at 0.6 percent. As we observed last week, supportive economic news has been able to produce gains for the US Dollar, reflecting the recent responsiveness of Fed officials to the apparently firming recovery via a gradual downgrade of dovish rhetoric. Weekly Jobless Claims data is also on tap but expectations point to relatively modest changes that are unlikely to materially impact the four-week trend in initial or continuing applications for benefits, meaning price action is unlikely to prove responsive to the release.

The Australian and New Zealand Dollars tumbled in overnight trade, down as much as 0.7 and 1.0 percent respectively, amid fears of slowing Chinese economic growth. HSBC reported that its China Manufacturing PMI gauge fell to 48.1 in March from 49.6 in the previous month, showing the factory sector shrank at the fastest pace in four months. China is a key export market for Australia and New Zealand and the drop-off in demand implied by the PMI reading weighed on economic performance expectations in the two countries, translating into a softer RBA and RBNZ interest rate outlook. The Kiwi underperformed as a disappointing fourth-quarter GDP report compounded selling pressure.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

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