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European Session – Euro under pressure on expectations of ECB action, dollar dented by weak US data

The markets turned from risk off to risk on by late European session trading. The start to the session saw negative sentiment as investors were disappointed with the outcome of the G20. They expected more to be done with respect to taking action to spur global growth.

However, market sentiment was soon boosted during the mid-session with the help of China announcing that they cut the reserve requirement ratio (RRR) so that the amount of cash banks must hold as reserves with the PBOC was lowered. This was the fifth time the central bank cut the RRR and this form of easing resulted in a weaker yuan. Meanwhile stocks rallied on the surprise news. The yen consequently weakened.

The dollar rose above 113 yen but soon erased gains and fell back down after some weak US data. The Chicago PMI index plunged to 47.6 in February following a sharp increase to 55.6 in the previous month. The dollar fell on the news and extended its decline after more disappointing data that showed US pending home sales fell 2.5% from December to January, compared with a 0.5% gain expected.

Data out of Europe today showed that the economic situation in the Eurozone was not as good in February as consumer prices fell on an annual basis. CPI declined to -0.2% year-on-year from a positive reading of 0.3% in January y/y. This shows the region is technically in deflation.

The dismal data is expected to pressure the European Central Bank to take more action in the March 10 policy meeting. Apart from cutting rates further, some even say the Bank could increase their asset purchases.

The euro was placed under pressure against the dollar and it fell below the key $1.09 level after the data. The diverging monetary policies of the ECB and the Fed are coming into focus again as the US economy recently gave evidence that it was on a stronger footing especially after fourth quarter GDP was revised higher last Friday. While the expectations for the number of Fed rate hikes has fallen drastically recently from four this year, at least one hike still remains on the table so far.

In other currencies, the British pound remained under pressure due to Brexit concerns. Sterling touched new seven-year lows today and continued to trade below $1.39.

Oil prices bounced higher, with US oil futures rising above $33 a barrel.

In other commodities, gold is on track for its biggest monthly gain in four years. The precious metal broke above $1233 an ounce today.

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