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European Session – Euro maintains 1.14 handle, BoE holds rates, pound rises

Posted on February 5, 2015 by the XM Investment Research Desk at 3:00 pm GMT

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The dollar was broadly weaker today, helping lift the euro and the pound. US trade data did little to support the greenback, although the main driver will be Friday’s all-important nonfarm payrolls.

 
The euro maintained the 1.14 handle, rallying to a high of 1.1456 to recover most of yesterday’s losses when it fell on news that the European Central Bank will no longer accept Greek sovereign bonds as collateral for regular financing.
Germany reported strong factory orders today while the EU growth forecast was upgraded. In addition, this week’s firmer Eurozone PMIs and retail sales all give optimism for an overall recovery in the region, helping temporarily offset the concerns in Greece.

 
The 4.2% rise in December factory orders in Germany was more than twice expectations, while the Eurozone growth forecast came in at 1.3% in 2015 and 1.9% in 2016 (previously 1.1% and 1.7%, respectively).

 
Sterling was higher today due to broad dollar weakness. Cable rose to as high as 1.5313, marking a 1-month high. The Bank of England made no change to monetary policy today, which was expected. It left the benchmark interest rate at 0.5% and the asset purchase program at £375 billion. While the pound has been quite steady in recent weeks after a sharp decline to an 18-month low, upcoming risks will keep it vulnerable – namely the UK elections in May. Meanwhile, in the nearer term, the BoE’s inflation report on February 12th and the BoE minutes on February 18 are also key risk events for the British currency.

 
With regards to the dollar/yen pair, it has been trading sideways all week between 116.86 and 117.98. The pair did not react to risk on/ risk off situations in the market, as it would normally tend to do. The dollar has been weak lately, especially after the soft US GDP number early this month. Today’s wider US trade deficit has the potential to impact Q4 GDP revision expectations. The deficit jumped 17.1% to $46.56 billion, the largest since November 2012.  Expectations were for the gap to narrow to $38 bln from a previous $39 bln.

 
There were some upbeat US data too today, with initial jobless claims rising less-than-expected last week (ending January 31). The number of Americans filing new claims for unemployment increased 11,000 to a seasonally adjusted 278,000, versus 290,000 expected. However, the main focus will be Friday’s nonfarm payrolls report.



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