EUR USD

Very quiet trading in the EUR USD today as Eurozone service sector PMI reports reflected acceleration in the pace of recovery for most of the region. The overall index for the Eurozone increased from 56.6 in December to 57.3 in January. The bulk of these gains were in the new business and expectations components. Italy was the primary laggard, with declines in all components aside from input prices. Although the PMI reports for Germany, France and Italy are all in expansionary territory (above the 50-mark), employment growth remains weak across the board, indicating that the strength in the euro may be denting business confidence. The ECB is scheduled to announce their monetary policy decision tomorrow - they are expected to leave rates unchanged. Nevertheless, the dollar continues to come under moderate pressure ahead of the G7 meeting, which begins this Friday. Today's price action indicates that the forex rate market is readjusting positions after the recent comments from US government officials suggesting that the G7 will fail to provide any support for the dollar.


USD CHF

The dollar failed to recoup yesteday's losses despite the sharp surge in service sector activity. The non-manufacturing ISM (Institute of Supply Management) index soared to a record high of 65.7 in January since the inception in 1997. This is the tenth consecutive month that the index has been in expansionary territory. US factory orders rose 1.1% in the month of December, while inventories remained unchanged, after falling 0.1% in November. Should this trend continue, companies would need to start restocking their inventories. Today's data confirms that despite the weakness in the dollar, the USD recovery is clearly underway. The manufacturing sector is also rebounding healthily, as suggested by Monday's strong manufacturing ISM report. 


GBP USD

The Bank of England is expected to tighten monetary policy tomorrow by raising the repo rate from 3.75% to 4.00%. Since the last MPC meeting in January, forex historical data has only supported the need for another rate hike after the first round of tightening last November. According to the minutes from the January 7/8 MPC meeting, the Bank of England voted 8:1 to keep rates on hold. Although the market expected at least 2 members to vote in favor of a rate hike, the minutes were still quite hawkish and supported the argument for a move in February. GDP and retail sales both surprised on the upside, while gains were seen in the prices paid component of the PMI index and the HBOS house price index. According to Bloomberg, all economists surveyed expect a rate hike tomorrow. Furthermore, yesterday's comments by the Treasury's chief economic adviser Ed Balls pretty much solidify a rate hike. According to Balls, ": "There is now a consensus . . . that a forward-looking and pre-emptive approach to monetary policy, backed by a sound fiscal policy, is the best way to lock in stability."

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