FX Market Summary 07-03-2013: Peripheral stresses sap Euro demand

The Euro was subjected to further selling pressure in early Europe Wednesday as Euro-zone fears intensified once again. Tensions surrounding Greece and Portugal continued to increase with Greece battling to agree terms with the troika over public-sector reforms and struggling to secure the next EUR8.1bn loan tranche. Portugal’s government was close to collapse following the resignation of two ministers with the possibility that new elections will have to be called.

There was a fresh economic setback in Italy with fresh deterioration in the PMI services index for June. As peripheral yield spreads widened and Portuguese equity markets fell sharply, there was a Euro slide to 1-month lows near 1.2925. Although market fears steadied slightly during the European session which allowed a tentative EUR/USD recovery, the underlying Euro-zone risk premium remained higher.

US data releases came under close scrutiny ahead of Friday’s pivotal payroll release. The headline ADP employment report was stronger than expected at 188,000 for June from a revised 134,000 previously while jobless claims edged down to 343,000 in the latest reporting week from 348,000. The dollar was unable to gain any traction against the Euro with a reluctance to add fresh positions ahead on Thursday’s Thanksgiving Holiday.

USD/JPY volatility spiked higher again as the pair initially dipped sharply in Europe from 100.85 to lows at 99.25 as risk appetite deteriorated on the back of weaker equity markets. The ADP data did trigger a relief rally, but USD/JPY was unable to regain the 100 level.

To complete the economic releases, the ISM services-sector index dipped to 52.2 from 53.7, although there was a significant improvement in the employment component.

The UK economic data was again stronger than expected with the PMI services index rising strongly to 56.9 for June from 54.9 the previous month. This was the highest figure for over two years following six consecutive monthly improvements.

In contrast to earlier this week, the stronger data provided a much more powerful and sustained move higher in Sterling. GBP/USD had already recovered from lows below 1.5150 ahead of the data and pushed sharply higher with a peak around 1.5280 during US trading on the back of short covering.  Sterling also tested resistance beyond 0.85 against the Euro, less than 24 hours after hitting support near 0.86.

The Australian dollar was subjected to renewed selling pressure on Wednesday following a speech from Reserve Bank Governor Stevens. The central bank head again suggested there was scope for lower interest rates and there was further rhetoric encouraging the currency to decline. Markets duly obliged with an AUD/USD slide to fresh 3-year lows close to 0.9050 before a marginal recovery.

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