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    European Session – Sterling underperforms as Brussels events raise Brexit risk

    Market sentiment was generally risk off today in reaction to news of the explosions in Brussels early today. The news helped drive up demand for safe haven assets like the yen and gold early in the European session. By the US session open, a portion of the Brussels-driven move was retraced though.

    Nervous investors bought up gold which helped to push prices above $1250 following a $10 surge after the news of the terrorist attacks.

    The yen strengthened versus the euro and the dollar as the Japanese currency is typically bought in times of financial uncertainty. Consequently, the euro plunged below 125 yen to its lowest level in over a week at 124.66.

    The dollar reversed gains made yesterday versus the yen on the back of comments by two Fed policymakers that supported interest rate increases as soon as next month. The greenback dropped to 111.37 after the Brussels events, after having reached levels above 112 yen earlier in the morning.

    The euro tumbled on risk aversion to reach one week lows against the dollar at 1.1187 before steadying back above 1.12. The headlines out of Brussels took investors’ focus away from the German IFO and ZEW surveys and Eurozone PMI data.

    The flash Eurozone manufacturing PMI for March was slightly better-than-expected at 51.4, marginally higher than the 51.3 expected and up from February’s 51.2 reading. The region’s services PMI was also upbeat, coming in at 54.0 in March versus 53.3 in February.

    Other data from Europe showed the closely watched German ZEW economic expectations index was reported at 4.3 in March versus 1.0 in February, although it missed estimates of 5.0. Another German sentiment survey released earlier showed the IFO business climate index rose to 106.7 in March from 105.7 in February and beat a forecast of 106.0.

    Sterling was one of the worst performing major currencies as the UK reported softer-than-expected inflation, while Brexit concerns continue to weigh on the currency. The pound lost 1.4% against the dollar since the start of the European session, falling from 1.4395 to 1.4189. The weaker pound helped the euro rally over 1% against it to rise to 0.7905 from 0.7813.

    Annual inflation in the United Kingdom was unchanged at 0.3% in February, falling short of estimates that it would edge up to 0.4%. On a month-on-month basis, CPI rose by 0.2%, which was half the 0.4% rate expected by economists. Today’s data supports the growing view that the Bank of England’s first rate hike since the financial crisis is unlikely to arrive in 2016. Meanwhile, today’s attacks on Brussels heightens Brexit risk since they could bolster the “leave” campaign as immigration and border controls remain at the centre of the referendum debate. The Paris attacks in November also had the effect of boosting anti-EU sentiment.

    Data that was in focus in the North American session was on US flash manufacturing PMI. The reading was up only fractionally from February’s 51.3 to 51.4 in March. The slow rate of growth highlights a struggling manufacturing sector.

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