Forex: Euro to Look Past PMI and GDP Revisions, Focus on ECB Outcome

Talking Points:

• Euro to Look Past PMI and GDP Revisions, Focus on ECB Outcome
• Pound May Fall as Soft PMI Data Highlights Eroding BOE Outlook
• Japanese Yen to Rise Anew if Ukraine Tensions Spark Risk Aversion

The final revision of February’s Eurozone Composite PMI is expected to confirm initial estimates showing the pace of manufacturing- and service-sector activity growth narrowly slowed compared with January. Separately, a revised fourth-quarter Eurozone GDP reading is forecast to mirror the preliminary print showing the economy added 0.3 percent, marking an improvement from the 0.1 percent increase recorded in the three months through September.

Absent particularly sharp deviations from consensus outcomes, the figures are unlikely to generate a strong response from the Euro as traders remain focused on the implications of stubborn disinflation for this week’s ECB monetary policy meeting. A gauge of regional inflation expectations (derived from bond yields) is hovering near two-year lows while the benchmark year-on-year CPI measure of the price growth rate sits near the lowest levels since late 2009.

With that said, only fourteen out of 54 economists polled by Bloomberg call for the central bank to cut its benchmark lending rate. Meanwhile, investors are pricing in a mere 2 percent probability of a We generally agree with the consensus view, expecting Mario Draghi and company to wait for the completion of the central bank’s Asset Quality Review (AQR) before easing further. Still, investors are unlikely feel comfortable committing to directional follow-through until after the ECB announcement passes.

February’s UK Services PMI report is expected to produce the fourth consecutive month of deceleration in sector activity growth. As with yesterday’s soft Construction PMI print, the result may direct attention to eroding BOE monetary policy bets and put pressure on the British Pound. Indeed, Sterling has been relatively resilient despite a slide in the benchmark 10-year UK bond yield since February 12, the same day the BOE unveiled its updated guidance framework, and some room for catch-up selling likely remains.

The crisis in the Ukraine remains a significant consideration. Risk appetite enjoyed a brisk recovery over the preceding 24 hours following reports that Russian President Vladimir Putin called an end to military exercises near the Ukrainian border, taking the move as a sign of de-escalation. A standoff between Russian and Ukrainian forces continues however and the possibility that unforeseen headline risk aggressively sparks renewed risk aversion is significant.Such an outcome stands to renew traders’ desire for safe-haven assets, boosting the Japanese Yen.

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

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