LONDON (Dow Jones)--The euro lost its perch
above $1.38 and continues to struggle just under
that level after some mixed economic data ahead
of the European Central Bank's interest rate
decision and subsequent news conference, all of
which come against the backdrop of heightened
tensions in Egypt.Euro-zone services sector performance proved
better than expected in January, with Germany
and France growing strongly despite weaker
figures elsewhere in the currency bloc. However,
retail sales in the euro zone fell for the second
month running in December. Taken together, the
data underscore the area's two-speed economy
and the dilemma facing European Central Bank
rate setters.
The ECB's rate verdict, at 1245 GMT, is widely
expected to bring no change but the news
conference after the event, at 1330 GMT, will be
the main draw. Whether ECB chief Jean-Claude
Trichet hardens the rhetoric on inflation will be
central for the euro's immediate future.
For now, at least, talking tough seems to be the
only option for the ECB as its hands are tied on
interest rates.
"Today's [Thursday's] ECB policy decision is
expected to be a non-event and the focus again
falls on President Trichet's subsequent press
conference. Hawkish overtones are expected
given the latest euro-zone CPI print for January
came in at +2.4% year-on year, which is well
above the ECB's target," said Gareth Berry
currency strategist at UBS. He added that UBS
economists don't expect a policy rate rise until the
fourth quarter of the year.
Concerns about the euro zone's debt woes
continues to simmer in the background, with
Standard & Poor's downgrade of Ireland
Wednesday working as a timely reminder. But
investors appear to have taken in their stride
Thursday's government bond offerings from
Spain and France which, although successful,
weren't exactly well received. Spain sold a total of
EUR3.5 billion of two-year and five-year bonds,
with respective cover of 2.0 and 1.8, while France
sold EUR1.725 billion of 3.75% 2021 OATS at a
yield of 3.61%, the highest since December 2009.
It feels like only yesterday that the market awaited
every euro-zone auction with bated breath, notes
Citi, adding that the auctions appear to have gone
unnoticed.
Overnight, Egypt moved back into the headlines
after skirmishes between protesters and
government forces left five dead. That left
investors a bit more wary about holding on to
assets considered less safe and led to fresh
demand for the dollar. The greenback also found
support from a strong ADP jobs report which
added to expectations of a strong payrolls
number Friday.
The pound was again the European session's star
performer as economic data Thursday shored up
U.K. rate-rise expectations.
The U.K.'s dominant services sector rebounded in
January, showing surprisingly solid growth after
activity in December was hit by heavy snowfall.
The services Purchasing Managers Index jumped
to 54.5 in January from 49.7 in December,
research group Markit and the Chartered Institute
of Purchasing and Supply. The surge easily
exceeded the modest rise to 51.5 predicted by
analysts polled by Dow Jones Newswires and
comes on the heels of strong equivalents in the
manufacturing and construction industries. The
new year looks to have started on a much
stronger footing after the cold snap towards the
end of 2010 dented fourth-quarter activity.
"The pound is being underpinned by rising U.K.
interest rate expectations borne from a spike in
inflation," said Neil Mellor, currency strategist at
Bank of New York Mellon.
In the light of the PMIs, the 0.5% drop in U.K.
fourth quarter GDP looks increasingly like a one-
off.
The pound hit a day high of $1.6277--close to its
highest level in a year--as investors moved to
price in early BOE rate rises.
The euro was at $1.3769 from $1.3810 late
Wednesday in New York, according to EBS. The
dollar was at Y81.73 from Y81.55, while the euro
was at Y112.52 from Y112.51. The pound was at
$1.6215 from $1.6184. The dollar was at CHF
0.9441 from CHF0.9400
The ICE Dollar Index, which tracks the dollar
against a trade-weighted basket of currencies,
was at 77.251 from 77.086.
above $1.38 and continues to struggle just under
that level after some mixed economic data ahead
of the European Central Bank's interest rate
decision and subsequent news conference, all of
which come against the backdrop of heightened
tensions in Egypt.Euro-zone services sector performance proved
better than expected in January, with Germany
and France growing strongly despite weaker
figures elsewhere in the currency bloc. However,
retail sales in the euro zone fell for the second
month running in December. Taken together, the
data underscore the area's two-speed economy
and the dilemma facing European Central Bank
rate setters.
The ECB's rate verdict, at 1245 GMT, is widely
expected to bring no change but the news
conference after the event, at 1330 GMT, will be
the main draw. Whether ECB chief Jean-Claude
Trichet hardens the rhetoric on inflation will be
central for the euro's immediate future.
For now, at least, talking tough seems to be the
only option for the ECB as its hands are tied on
interest rates.
"Today's [Thursday's] ECB policy decision is
expected to be a non-event and the focus again
falls on President Trichet's subsequent press
conference. Hawkish overtones are expected
given the latest euro-zone CPI print for January
came in at +2.4% year-on year, which is well
above the ECB's target," said Gareth Berry
currency strategist at UBS. He added that UBS
economists don't expect a policy rate rise until the
fourth quarter of the year.
Concerns about the euro zone's debt woes
continues to simmer in the background, with
Standard & Poor's downgrade of Ireland
Wednesday working as a timely reminder. But
investors appear to have taken in their stride
Thursday's government bond offerings from
Spain and France which, although successful,
weren't exactly well received. Spain sold a total of
EUR3.5 billion of two-year and five-year bonds,
with respective cover of 2.0 and 1.8, while France
sold EUR1.725 billion of 3.75% 2021 OATS at a
yield of 3.61%, the highest since December 2009.
It feels like only yesterday that the market awaited
every euro-zone auction with bated breath, notes
Citi, adding that the auctions appear to have gone
unnoticed.
Overnight, Egypt moved back into the headlines
after skirmishes between protesters and
government forces left five dead. That left
investors a bit more wary about holding on to
assets considered less safe and led to fresh
demand for the dollar. The greenback also found
support from a strong ADP jobs report which
added to expectations of a strong payrolls
number Friday.
The pound was again the European session's star
performer as economic data Thursday shored up
U.K. rate-rise expectations.
The U.K.'s dominant services sector rebounded in
January, showing surprisingly solid growth after
activity in December was hit by heavy snowfall.
The services Purchasing Managers Index jumped
to 54.5 in January from 49.7 in December,
research group Markit and the Chartered Institute
of Purchasing and Supply. The surge easily
exceeded the modest rise to 51.5 predicted by
analysts polled by Dow Jones Newswires and
comes on the heels of strong equivalents in the
manufacturing and construction industries. The
new year looks to have started on a much
stronger footing after the cold snap towards the
end of 2010 dented fourth-quarter activity.
"The pound is being underpinned by rising U.K.
interest rate expectations borne from a spike in
inflation," said Neil Mellor, currency strategist at
Bank of New York Mellon.
In the light of the PMIs, the 0.5% drop in U.K.
fourth quarter GDP looks increasingly like a one-
off.
The pound hit a day high of $1.6277--close to its
highest level in a year--as investors moved to
price in early BOE rate rises.
The euro was at $1.3769 from $1.3810 late
Wednesday in New York, according to EBS. The
dollar was at Y81.73 from Y81.55, while the euro
was at Y112.52 from Y112.51. The pound was at
$1.6215 from $1.6184. The dollar was at CHF
0.9441 from CHF0.9400
The ICE Dollar Index, which tracks the dollar
against a trade-weighted basket of currencies,
was at 77.251 from 77.086.
