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Euro Heads Higher as Data Improves - Decoupling in the Making?
Friday, February 22, 2008
The flash estimates for Eurozone PMI services surprised to the upside tonight, printing at 52.3 versus 51.0, with manufacturing in line with expectations at 52.3. The Euro firmed against the dollar on the news, building on yesterday’s gains after a seven year low reading in the Philadelphia Fed index sparked fears in the currency market of an oncoming U.S. recession

Contrary to consensus calls of a similar slowdown in Europe, the PMI services component saw gains in employment and new orders, strengthening the ECB’s argument that the Eurozone economy remains string enough to weather the current credit crunch without the need for monetary easing. On the other hand, the manufacturing sector showed weakness as industrial new orders declined the most in over two years burdened by weaker US demand and persistently high exchange rates. In short it appears, that the ECB will stay put for time being, but may be inclined to consider a rate cut in the second half of the year if the manufacturing data continues  to deteriorate.

Tonight however, the auro bulls argument that the two largest economies in the world are in fact decoupling in their growth outlooks, received a strong boost from the PMI releases.  For the near term, the price action in the pair is likely to be driven almost exclusively by US news. With Euro-zone economic growth slowing only slightly leaving rates in the region stationary at 4%, the only real question for the market is how low will US rates go if the US economy begins to contract. If the Europeans can continue to expand albeit moderately, while US experience an actual decline in GDP growth, the pair could easily break the 1.500 barrier as dollar sentiment will sour further.

The EURUSD tried to scale the 1.4850 barrier several time in early European trade but was stymied by option defense activity. Nevertheless, with US calendar empty today, chances are good that traders in North American session could rally the pair further taking out the stops at the 1.4850 level.
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