The end of last week saw a deluge of market data that on any other day may have been more impactful. However the global economy’s reaction remained relatively muted throughout the day in anticipation of the looming fiscal cliff deadline. We now know that an agreement could not be reached, leaving Obama no choice but sign off a number of budget cuts expected to be around $1.2tn over the next decade.
This opened the door for GBP/USD to test the hugely significant 1.50 level as well as EUR/USD slipping below 1.30 for the first time in 8 weeks. Compounding the pounds status as the biggest loser in recent sessions was the UK PMI Manufacturing data that came out at 47.9 rather than a more optimistic 51.
Looking ahead to this week, the markets will still be keen to see how the US and indeed the global economy will react once the dust has settled following the sequester. Is the pound destined to trade below 1.50 and enter a new trading range akin to that of 3 years ago? Or will positive data in the Bank of England’s interest rate and QE decisions later in the week push the pound higher? UK PMI construction figures this morning revealed yet more negative data from the UK; coming out at a disappointing 46.8.
The downtrend of the last 2 months would suggest that a fall below 1.50 is inevitable however this key level has been tested several times in recent years and as yet, we have yet to see a significant drop down. The next few days will be key in determining the trading range for the foreseeable future.
The euro zone was also no stranger to market data last week not to mention stealing the limelight with the Italian elections last week. Many believe that the euro is overvalued and the downtrend that has engulfed GBP/EUR since the start of the year has been halted, for now at least. Levels approaching 1.16 would appear welcome relief for many UK importers after the lows of 1.134.
09.30am – GBP – UK PMI Construction (FEB): Came in at a disappointing 46.8 instead of 49.
10.00am – EUR – Euro zone Producer Price Index (YoY): Fell in line with expectations at 1.9%
14.00pm – EUR - Eurozone finance ministers meeting in Brussels.